R&D, Inc., needs to raise $200 million to finance firm expansion. In discussions with its investment bank, R&D's learns that the bankers recommend a debt issue with an offer price of $1,000 per bond and they will charge an underwriter's spread of 3 percent of the gross price. How many bonds will R&D need to sell in order to receive the $200 million they need?

Question

Quizplus · Accepted Answer

R&D, Inc. needs to net $200 million after accounting for the underwriter's spread of 3%. The gross amount raised per bond is $1,000, but R&D will only receive 97% of this ($1,000 - 3% of $1,000 = $970 net per bond). To find out how many bonds they need to sell to receive $200 million, divide the total amount needed by the net amount received per bond: $200,000,000 / $970 = 206,185.57. Since they can't sell a fraction of a bond, they need to sell 206,186 bonds.

R&D, Inc, Needs to Raise $200 Million to Finance Firm Expansion