Final answer:
The statement is true; stock prices are based on the present value of expected future earnings, and this valuation uses the present discounted value methodology to determine what investors are willing to pay now for anticipated future benefits.
Step-by-step explanation:
The statement that a stock's price is based on the expected present value, at the market capitalization rate, of all the stock's future earnings is true. Stock prices are influenced by the market's expectations of a company's future performance, and these prices fluctuate according to changes in these expectations. Analysts and investors spend considerable time researching companies to predict which will have better-than-expected future earnings. The present discounted value (PDV) concept helps calculate the appropriate price for a stock by considering expected future profits, capital gains, and dividends, discounted at a particular interest rate to their value in present terms.
It's important to note that in the real world, expected profits and the appropriate discount rate are not absolute and are subject to differing opinions among investors. The concept of PDV is thus applied not only to stock valuation but also to bonds, correlating the bond prices to future payments, interest rates, and their face value.