Calculating Costs of Issuing Debt 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?
A)4,750
B)5,000
C)5,250
D)5,264

Question

Quizplus · Accepted Answer

To determine the number of bonds American Movers needs to sell, we can use the following formula:

Net proceeds = Gross proceeds - Underwriter's spread

We know that gross proceeds per bond are $1,000 and the underwriter's spread is 5% of the gross proceeds. So, in this case:

Underwriter's spread = 0.05 x $1,000 = $50
Net proceeds per bond = $1,000 - $50 = $950

To raise $5 million, the company needs to sell:

Number of bonds = Amount to be raised / Net proceeds per bond
= $5,000,000 / $950
= 5,263.16

Since the number of bonds needs to be a whole number, American Movers needs to sell 5,264 bonds, which is answer choice D).