Calculating Costs of Issuing Debt American Movers, Inc., needs to raise $5 million to finance an expansion. In discussions with its investment bank, American 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 5 percent of the gross proceeds. How many bonds will Home Improvement need to sell in order to receive the $5 million they need?

Question

Quizplus · Accepted Answer

To raise $5 million, American Movers, Inc. needs to sell $1,000 x 5,000 = $5,000,000 worth of bonds.

The underwriter's spread will be 5% of the gross proceeds, which is 0.05 x $1,000 = $50.

The net proceeds per bond will be $1,000 - $50 = $950.

The number of bonds American Movers, Inc. needs to sell is $5,000,000/$950 = 5,263.16.

Since bonds are typically sold in whole numbers, the company will need to sell 5,264 bonds.

Therefore, the correct answer is D.