Sipe's Paint and Wallpaper, Inc., needs to raise $1.25 million to finance plant expansion. In discussions with its investment bank, Sipe's Paint and Wallpaper 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 8.25 percent of the gross proceeds. How many bonds will Sipe's Paint and Wallpaper need to sell in order to receive the $1.25 million they need?

Question

Quizplus · Accepted Answer

To calculate the number of bonds Sipe's Paint and Wallpaper needs to sell to receive $1.25 million, we first determine the net proceeds per bond by subtracting the underwriter's spread from the gross proceeds. The underwriter's spread is 8.25% of $1,000, which is $82.50. Therefore, the net proceeds per bond are $1,000 - $82.50 = $917.50. To find out how many bonds are needed to raise $1.25 million, we divide the total amount needed by the net proceeds per bond: $1,250,000 / $917.50 = 1,362.3188. Since the company cannot sell a fraction of a bond, it needs to sell 1,363 bonds to meet its financial requirement.