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:

Periodic Inventory System

An accounting method where inventory and its cost of goods sold are determined at the end of an accounting period based on a physical count.

Balance Sheet

A financial statement that provides a snapshot of a company’s financial condition at a specific point in time, detailing assets, liabilities, and shareholders' equity.

Purchases Returns

Goods returned to the supplier from the buyer, often due to defects, inaccuracies, or other issues.

Purchases Discounts

Discounts taken by the buyer for early payment of an invoice.