A firm issues $250 million in straight bonds at an original issue discount of 1.5% and a coupon rate of 6%.The firm pays fees of 3% on the face value of the bonds.The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

Question

Quizplus · Accepted Answer

Step 1: Find the amount of original issue discount.
Original issue discount = face value of bonds x original issue discount rate
= $250 million x 1.5%
= $3.75 million

Step 2: Find the net proceeds from the bond issue.
Net proceeds = face value of bonds - original issue discount - fees
= $250 million - $3.75 million - ($250 million x 3%)
= $250 million - $3.75 million - $7.5 million
= $239 million

Therefore, the net amount of funds that the debt issue will provide for the firm is $239 million, which is closest to choice B).

A Firm Issues $250 Million in Straight Bonds at an Original