Use the Information for the Question(s)below

question 66

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 Bernard is closest to:

• A)+5%.
• B)-2%.
• C)-3%.
• D)+2%.

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Definitions:

Closely Linked

Having a very strong relationship or connection between two or more things.

Doctrine

A belief or set of beliefs held and taught by a church, political party, or other group.

Violent Methods

Approaches or actions that involve physical force intended to hurt, damage, or kill someone or something.

Shark-Infested Waters

Used metaphorically to describe a situation full of dangers and risks, or, literally, waters that have a high population of sharks.