Allen Corporation can (1) build a new plant that should generate a before-tax return of 10%, or (2) invest the same funds in the preferred stock of Florida Power & Light (FPL), which should provide...

Allen Corporation can (1) build a new plant that should generate a before-tax return of 10%, 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 50% 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) a 60% in the project, 40% in FPL

B) 60% in FPL; 40% in the project

c) 50% in each

D) all in the plant project

e) all in FPL preferred stock