Principles of Managerial Finance, 15th Edition

7.3 Common Stock Valuation

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Common stockholders expect rewards through periodic cash flows, such as cash dividends, or an increasing share value. Some investors decide which stocks to buy and sell based on a strategy to hold a broadly diversified portfolio of stocks. Other investors have a more speculative motive for trading only specific stocks. These investors try to spot companies whose shares are misvalued, meaning that the true value of the shares is different from the current market price. These investors buy shares they believe to be undervalued (i.e., the market price is less than the true value) and sell shares they think are overvalued (i.e., the market price is greater than the true value). Regardless of one’s motive ...