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%.

16) 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

Answer:

Explanation:

17) 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

Answer:

Explanation:

18) The alpha for Chihuahua is closest to:

A) +2%

B) -5%

C) -3%

D) +3%

Answer:

Explanation:

19) The alpha for Bernard is closest to:

A) +5%

B) -2%

C) -3%

D) +2%

Answer:

Explanation: