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:

Entrepreneurship

The act of establishing a company or companies, while accepting monetary risks with the aspiration of earning profits.

Act On Them

To take action or respond based on specific ideas, feelings, or information.

New Opportunities

Fresh ventures or conditions that present potential for profit and growth in a business or personal context.

Corporate Entrepreneur

An individual within a corporation who promotes innovation and new business development, similar to an entrepreneur within a startup.