Allen Corporation Can (1) Build a New Plant Which Should

question 29

Multiple Choice

Allen Corporation can (1) build a new plant which should generate a before-tax return of 11 percent, 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 percent, all in the form of dividends. Assume that Allen's marginal tax rate is 25 percent, and that 70 percent 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.