Fortunately, most executives are ho

Fortunately, most executives are honest. But even for honest companies, it is
hard for investors to determine the proper price of a stock. Figure 1.2 illustrates the
situation. The top box indicates that managerial actions, combined with the economy,
taxes, and political conditions, influence the level andriskiness of the company’s future
cash flows which ultimately determine the company’s stock price. As you might
expect, investors like higher expected cash flows, but they dislike risk; so the larger
the expected cash flows and the lower the perceived risk, the higher the stock’s price.