Use the Information for the Question(s)below

question 56

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 Chihuahua is closest to:

• A)+2%.
• B)-5%.
• C)-3%.
• D)+3%.

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Definitions:

Systems Theory Approach

A perspective that views entities as open systems interacting with their environments and emphasizes the interrelatedness of components within an entity.

Input-Process-Output Model

A framework used to understand how groups transform inputs (resources, information, etc.) through processes (communication, decision-making) to produce outputs (solutions, decisions).

Social Exchange Theory

A theory suggesting that human relationships are formed based on a subjective cost-benefit analysis and the comparison of alternatives.

Social Exchange Theory

A theoretical framework suggesting that social behavior is the result of an exchange process to maximize benefits and minimize costs.