Use the Information for the Question(s) Below

question 23

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 a cost of capital of 15%. Bernard Industries is not as shaky as Chihuahua, so Bernard has a cost of capital of only 10%. Assume that the market portfolio is not efficient. Both stocks have the same beta and the CAPM would assign them both an expected return of 12%.
-The market value for Chihuahua Corporation is closest to

• A) $10.0 million.
• B) $12.5 million.
• C) $12.0 million.
• D) $15.0 million.

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Definitions:

Price Subsidies

Financial assistance provided by the government to lower the cost of goods or services.

Income Subsidies

Financial assistance provided by the government to individuals or groups to help support their income and reduce economic inequality.

Farm Policies

Government rules and programs designed to support farmers, influence agricultural production, stabilize prices, and ensure food security.

Economic Problem

The issue of limited resources with unlimited wants, necessitating choices about what and how to produce for society.