Home Improvement, Inc. needs to raise $3.90 million to finance plant expansion. In discussions...

Question:

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

A) 4,334

B) 4,290,000

C) 4,333,333

D) 4,290

Answer and Explanation:

The correct choice is Option A.

Let the number of bonds to be issued be a

or,

Gross Proceeds - Underwriters commission = Net Proceeds

or,

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

or,

900 x a = $3.90 million

or,

a = 3,900,000 / 900 = 4334 bonds


Learn more about this topic:

Determining a Bond's Issuance Price

from Accounting 101: Financial Accounting

Chapter 10 / Lesson 9
3.6K

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