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

question 26

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 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 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.

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Definitions:

Macro Uncertainty

The uncertainty that exists within the broad economy which can impact decision-making and future outcomes on a large scale.

Break-even Analysis

Break-even analysis is a financial calculation used to determine the point at which revenue equals costs, indicating no net loss or gain, and is used for decision making in business planning.

Employee Wages

Employee wages refer to the fixed regular compensation paid by employers to employees for their labor or services, typically expressed as an hourly, daily, or monthly rate.

Environmental Uncertainty

A condition where there is a lack of information about the environmental factors that can affect an organization's operations.