Home Improvement, Inc., needs to raise $2 million to finance plant expansion. In discussions with its investment bank, Home Improvement learns that the bankers recommend a debt issue with gross proceeds of $1,000 per bond and they will charge an underwriter's spread of 7 percent of the gross proceeds. How many bonds will Home Improvement need to sell in order to receive the $2 million they need?

Question

Quizplus · Accepted Answer

To raise $2 million net, considering the underwriter's spread of 7%, Home Improvement, Inc. needs to account for this fee in the total amount raised. The net amount per bond is $1,000 * (1 - 0.07) = $930. To find out how many bonds are needed to raise $2 million, divide the total amount needed by the net amount per bond: $2,000,000 / $930 ≈ 2150.54. Since they can't sell a fraction of a bond, they need to sell at least the next whole number of bonds, which is 2,151.