A Firm Has $2 Million in Retained Earnings

question 4

Multiple Choice

A firm has $2 million in retained earnings.It can lend out the money at the rate of 11 percent per year,keep the money as idle cash,or earn invest in government bonds and earn 10 percent per year.Suppose the firm also needs $2 million for a new project which will give an 8 percent return per year.What should the firm do to maximize its return?

• A)It should lend out the money at an interest of 11 percent per annum.
• B)It should purchase government bonds promising a 10 percent return per annum.
• C)It should invest the money in its new project.
• D)It should keep the money as idle cash.

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