Calculating Costs of Issuing Debt 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?
A)194,000
B)200,000
C)206,000
D)206,186

Question

Quizplus · Accepted Answer

To calculate the number of bonds R&D needs to sell, we first need to determine the amount of money that will be received from selling one bond.

- The offer price of one bond is $1,000. 
- The underwriter's spread is 3% of the gross price, which means that R&D will receive 97% of the offer price after paying the underwriter. 
- Therefore, the amount of money R&D will receive from selling one bond is: 
      $1,000 x 0.97 = $970

To raise $200 million, R&D needs to sell:

$200,000,000 ÷ $970 = 206,186.18

Rounding up, R&D needs to sell 206,186 bonds, which is option D.