Use the Information for the Question(s) Below

question 68

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 Bernard Industries is closest to

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

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