Answer:
Correct option is (B)
Explanation:
Given:
Bond issue amount = $15,000,000
Market interest rate = 7.75%
Investors cannot pay interest more than $1,150,000
Choate cannot choose 6.5%, the bond will become less attractive to investors as it indicates that the bond is selling at discount.
If 7.75% interest is given that is the market interest, then interest amount would be $1,162,500 (15,000,000 × 0.0775)
Choate cannot afford to pay more than $1,150,000, so it cannot offer bonds at 7.75% or 8.1%.
The only option left is 7.65%. Interest amount would be $1,147,500 (15,000,000 × 0.0765) which is less than what the company can afford. Also, it is just marginally lesser than market interest rate of 7.75%, so bonds would still be attractive.
Choate should select 7.65%.
