Sipe's Paint and Wallpaper, Inc., needs to raise $1.25 million to finance plant expansion. In discussions with its investment bank, Sipe's learns that the bankers recommend a debt issue with a gross proceeds of $1,000 per bond and they will charge an underwriter's spread of 8.25 percent of the gross proceeds. How many bonds will Sipe's Paint and Wallpaper need to sell in order to receive the $1.25 million they need?

Question

Quizplus · Accepted Answer

To raise $1.25 million, Sipe's Paint and Wallpaper needs to sell bonds worth:

$1.25 million/($1,000 per bond) = 1,250 bonds

The underwriter's spread is 8.25% of the gross proceeds, which means Sipe's will receive:

(1 - 0.0825) x $1,000 = $917.50 per bond

To receive $1.25 million, Sipe's will need to sell:

$1.25 million/$917.50 per bond = 1,362.96 or 1,363 bonds (rounded up to the nearest whole number)

Therefore, the best choice is B - 1,363 bonds.