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 American Movers need to sell in order to receive the $5 million they need?

Question

Quizplus · Accepted Answer

American Movers will receive only 95% of the gross proceeds from each bond due to the 5% underwriter's spread. Therefore, for each $1,000 bond, they receive $1,000 * 0.95 = $950. To raise $5 million, they need $5,000,000 / $950 = 5,263.1579 bonds. Since they can't sell a fraction of a bond, they need to sell 5,264 bonds.