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

question 5

Multiple Choice

Allen Corporation can (1) build a new plant that should generate a before-tax return of 11.00%,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 9.00%,all in the form of dividends.Assume that Allen's marginal tax rate is 25.00%,and that 70.00% 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? (Round your final answer to two decimal places. )

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

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Definitions:

Bootstrap Method

A statistical method that involves repeatedly sampling with replacement from a data set to estimate the sampling distribution and compute statistical accuracies.

Standard Deviation

A measure of the amount of variation or dispersion in a set of values, indicating how much the individual values differ from the mean of the values.

Resamples

The action of taking multiple sample sets from the original data, often used in bootstrap methods and other resampling techniques in statistics.

Normal

Refers to something conforming to a standard; typical or expected under specific conditions.