1. Jewel Regal Cars (JRC) must raise $240 million to support operations. To do so, JRC plans to issue new bonds. Investment bankers have informed JRC that the flotation costs will be 4 percent of the total amount issued. If the market value of each bond is $1,000, how many bonds must JRC sell to net $240 million after flotation costs? Assume that fractions of bonds cannot be issued.

JRC must sell 250,000 bonds to net $240 million after flotation costs.

Explanation:

It should be noted that flotation costs can be described as the costs that to be incurred when firm issues securities. Floating costs usually include underwriting fees, registration fees, legal costs, commission, etc.

Since JRC must raise net $240 million after flotation costs, this implies that flotation costs must be deducted from the total amount raised to arrive at $240 million.

To calculate this net $240 million after flotation costs, we let x represents the total bonds that JCR must sell to net $240 million after flotation costs. Therefore, we have:

Total amount raised = Bond market value * x = $1,000 * x = $1,000x

Floating costs = Total amount raised * 4% = $1,000 * x * 4% = $40x

Therefore, net $240 million after flotation costs is given as:

Total amount raised - Floating costs = $240,000,000 (1)

Substituting the relevant values into equation (1) and solve for x, we have:

$1000x - $40x = $240,000,000

$960x = $240,000,000

x = $240,000,000 / $960

x = 250,000

Therefore, JRC must sell 250,000 bonds to net $240 million after flotation costs.

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