Roy's Bar, Inc., needs to raise $25 million to finance firm expansion. In discussions with its investment bank, Roy's learns that the bankers recommend a debt issue with an offer price of $1,000 per bond and they will charge an underwriter's spread of 6 percent of the gross price. How many bonds will Roy's need to sell in order to receive the $25 million they need?

Question

Quizplus · Accepted Answer

Roy's Bar, Inc. needs to net $25 million after accounting for the 6% underwriter's spread. Since the spread is 6% of the gross, Roy's actually receives 94% (100% - 6%) of the gross proceeds from each bond. To find out how many bonds they need to sell, divide the total amount needed by the net amount received per bond: $25,000,000 / ($1,000 * 0.94) = 26,595.7447. Since they can't sell a fraction of a bond, they need to sell 26,596 bonds.