Ship Shape Marine (SSM) needs $92 million to support future growth. If SSM issues bonds to raise funds, flotation (issuance) costs will be 8 percent. Each bond will be sold for $1,000; fractions of bonds cannot be issued. How many bonds must be issued so that SSM has $92 million after flotation costs to use for its planned growth?

Question

Quizplus · Accepted Answer

To raise $92 million, SSM needs to take into account the flotation costs (8%):
$92 million / (1 - 8%) = $92 million / (0.92) = $100 million

So, SSM needs to sell $100 million worth of bonds.
Each bond has a face value of $1,000, so the number of bonds needed is:
$100 million / $1,000 = 100,000

Therefore, SSM needs to issue 100,000 bonds to have $92 million after flotation costs to use for its planned growth.

Ship Shape Marine (SSM) Needs $92 Million to Support Future