Use the Information for the Question(s)below

question 13

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 market value for Chihuahua is closest to:

• A)$10.0 million.
• B)$12.5 million.
• C)$12.0 million.
• D)$15 million.

---

Definitions:

Binomial Formula

A mathematical formula used to calculate the probability of obtaining a given number of successes in a binomial experiment.

Random Sample

A subset of individuals chosen from a larger set (population) where each individual has an equal probability of being selected, ensuring the sample’s representativeness of the population.

Binomial Random Variable

A random variable that follows a binomial distribution, representing the number of successes in a fixed number of independent Bernoulli trials with the same probability of success.

Variance

Variance is a statistical measure that represents the degree of spread in a data set. It is calculated as the average of the squared differences from the Mean.