Use the Information for the Question(s)below

question 54

Multiple Choice

Use the information for the question(s) below.
Consider two firms,Chihuahua Corporation and Bernard Industries that are each expected to pay the same $1.5 million dividend every year in perpetuity.Chihuahua Corporation is riskier and has an equity cost of capital of 15%.Bernard Industries is not as shaky as Chihuahua,so Bernard has an equity cost of capital of only 10%.Assume that the market portfolio is not efficient.Both stocks have the same beta and an expected return of 12%.
-The market value for Bernard is closest to:

• A)$12.0 million.
• B)$10 million.
• C)$15.0 million.
• D)$12.5 million.

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Definitions:

Rising Interest Rates

A condition in the economy where the cost of borrowing money increases over time, usually as a result of central banking policies aimed at controlling inflation.

Cash Flow Matching

A strategy where an investor aims to align the cash flows from their investments with their anticipated liabilities or cash flow needs.

Annuity Holders

Individuals or entities that have invested in an annuity contract, which typically provides fixed or variable payments at regular intervals.

Insurance Company

A financial institution that provides various forms of insurance policies to protect individuals or businesses against risks in exchange for premiums.