Home Improvement, Inc. needs to raise $3.90 million to finance plant expansion. In discussions with its investment bank, Home Improvement learns that the bankers recommend a debt issue with a gross proceeds of $1,000 per bond and they will charge an underwriter's spread of 10% of the gross proceeds. How many bonds will Home Improvement need to sell in order to receive the $3.90 million they need? Show your work
Answer and Explanation:
The correct choice is Option A.
Let the number of bonds to be issued be a
Gross Proceeds - Underwriters commission = Net Proceeds
Gross proceeds per bond x Number of bonds - 10% of Gross Proceeds = Net Proceeds
As per the question,
(1000 x a) - (10% x 1000 x a) = $3.90 million
900 x a = $3.90 million
a = 3,900,000 / 900 = 4334 bonds
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from Accounting 101: Financial AccountingChapter 10 / Lesson 9
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