Last Year Monaco Hotels Distributed $26

Last year Monaco Hotels distributed $26.25 million in dividends to its seven million common shareholders. Monaco Hotels is planning a $75 million resort hotel in Tobago. The expected income before income taxes is $20 million of which 25% will be distributed to the 7 million common shareholders over and above the amount of dividends equivalent to those distributed last year. Common shares trade for $42 per share. 1.3 million Class A cumulative preferred shares trade for $16.40 and carry a dividend of $1.23 per share. The company can fund the project through an issue of a new class of irredeemable cumulative preferred shares priced at $14 a share with a return rate similar to that of the Class A shares. Alternatively, it can issue of bonds with a face value of $1,000 and an interest rate of 6.8%. Applying a tax rate of 24% and ignoring issuing costs, which option will provide the highest incremental EPS from the project?

A) The bond option providing an incremental EPS of 0.40
B) The equity option providing an incremental EPS of $1.42
C) The bond option providing an incremental EPS of $1.62
D) The equity option providing an incremental EPS of $2.17
E) The bond option providing an incremental EPS of $6.07