Calculating Costs of Issuing Debt Home Improvement,Inc.,needs to raise $2 million to finance plant expansion.In discussions with its investment bank,Home Improvement 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 7 percent of the gross proceeds.How many bonds will Home Improvement need to sell in order to receive the $2 million they need?
A)2,140
B)2,151
C)2,150,537
D)2,140,000

Question

Quizplus · Accepted Answer

To raise $2 million, Home Improvement needs to sell $2,000,000 / $1,000 = 2,000 bonds.

The underwriter's spread is 7% of the gross proceeds, which is 0.07 x $1,000 = $70 per bond.

Therefore, the net proceeds per bond are $1,000 - $70 = $930.

To raise $2 million in net proceeds, Home Improvement needs to sell $2,000,000 / $930 = 2,150.54 bonds.

Since Home Improvement can't sell a fraction of a bond, the nearest whole number is 2,151 bonds.

Therefore, the answer is B) 2,151.