Allen Corporation Can (1)build a New Plant That Should Generate

question 19

Multiple Choice

Allen Corporation can (1) build a new plant that should generate a before-tax return of 11%,or (2) invest the same funds in the preferred stock of Florida Power & Light (FPL) ,which should provide Allen with a before-tax return of 9%,all in the form of dividends.Assume that Allen's marginal tax rate is 25%,and that 70% of dividends received are excluded from taxable income.If the plant project is divisible into small increments,and if the two investments are equally risky,what combination of these two possibilities will maximize Allen's effective return on the money invested?

• A)All in the plant project.
• B)All in FPL preferred stock.
• C)60% in the project; 40% in FPL.
• D)60% in FPL; 40% in the project.
• E)50% in each.

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Definitions:

Longitudinal

A research design or study that follows subjects over a period of time, allowing for the observation of long-term effects or changes.

Participants

Individuals who take part in a research study or experiment.

Impulsive

Characterized by actions taken without forethought or consideration of the consequences; spontaneous behavior.

Conservative

A political and social ideology that emphasizes the value of traditional institutions and practices, resistance to rapid change, and cautiousness in political and social reform.