Use the Information for the Question(s)below

question 66

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 alpha for Bernard is closest to:

• A)+5%.
• B)-2%.
• C)-3%.
• D)+2%.

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Definitions:

Free Cash Flow

The amount of cash a company generates after accounting for cash outflows to support operations and maintain capital assets. It's an important measure of financial health.

Capital Expenditures

Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings, or equipment to improve long-term operations.

Indirect Method

A way of reporting cash flows from operating activities in the cash flow statement by starting with net income and adjusting for non-cash transactions.

Accounts Receivable

Outstanding payments due to a company from its customers for delivered goods or services.