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:

Effort Justification

A phenomenon where individuals assign greater value to outcomes they have put significant effort into achieving, regardless of the actual value of the outcome.

Universally Applicable

Refers to principles, rules, or criteria that are relevant and can be applied in every situation, without exceptions.

Special Benefits

Privileges or advantages provided to individuals or groups under specific conditions or circumstances.

Cognitive Dissonance

A psychological discomfort experienced when holding two or more conflicting beliefs, ideas, or values.