Last Year Monaco Hotels Distributed $26

question 41

Multiple Choice

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

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Definitions:

Repressor

A substance, often a protein, that inhibits the expression of a gene.

Differentiated Cell

A cell that has developed and specialized to perform a specific function in the body.

Genes

Sequences of DNA that contain the instructions to build and maintain an organism's cells and pass traits to offspring.