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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Definitions:

Life Expectancy

The average period that an individual is expected to live based on demographic factors like the current mortality rates.

Self-Control

The ability to regulate one's emotions, thoughts, and behavior in face of temptations and impulses.

Prejudice

Preconceived opinion or bias against an individual or group without sufficient knowledge, rational reasoning, or experience.

Discrimination

Unfair or prejudicial treatment of different categories of people or things, especially on the grounds of race, age, or sex.