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:

Subsidy

A financial contribution granted by a government or other organization to support an economic activity, reduce the price of a commodity or service, or for other purpose deemed beneficial.

Cost Schedule

A detailed listing of all costs associated with a project or production process, often segmented by types or periods.

Patent

A legal document granted by the government giving an inventor exclusive rights to make, use, and sell an invention for a certain period of years.

Marginal Cost

The increase or decrease in the total cost of a production run for making one additional unit of an item.