Final answer:
A corporation's advantage in raising money is its capacity to do so through selling stocks, issuing bonds, and borrowing from banks, all made easier due to limited shareholder liability, longevity, and transferability of ownership. Early-stage finance often relies on private investors for small companies, while an IPO might be used for larger capital needs. Bank loans tend to be more suitable for smaller firms and bonds for larger, more stable companies.
Step-by-step explanation:
Why is Corporate Structure Beneficial for Raising Money?
The main advantage of a corporation when it comes to raising money is its status as a legal entity. This allows it to perform actions much like an individual, such as suing or being sued, entering into contracts, and filing for bankruptcy. Furthermore, raising capital is facilitated through various means. A corporation can borrow money from banks, sell shares, or issue bonds. Shareholder liability is limited to their investment, making it an attractive option for potential investors. Corporations also have the ability to attract top talent which can lead to better innovation and higher profits. The transition of ownership is streamlined through the trade of company stocks, contributing to its longevity and sustained growth potential.
Raising Money in Early-Stage Corporate Finance
Very small companies often raise money from private investors because the process is simpler and does not require the disclosure and regulatory requirements of an IPO (Initial Public Offering). As companies grow, an IPO might be preferred due to the significant capital that can be raised and the increased visibility and credibility it provides. Venture capitalists typically have more information about the potential profits of a small firm compared to a bondholder as they are involved in the management and have intimate knowledge of the company's operation. In contrast, bondholders are only assured by the general financial health of the company.
Comparing Bank Loans and Bonds
For firms, both bank loans and bonds are means of finance, but they come with different nuances. Bank borrowing is more tailored to individual firms and especially advantageous for smaller companies, as banks can closely monitor the firm's financial activities. Large and well-known firms may opt for issuing bonds to raise capital for new investments, retiring older debts, or acquisitions. The decision between bank loans and bonds is not always clear-cut as sometimes small firms issue bonds, and banks can offer large loans.
Fred's equity in his new house, after putting down 10%, would be $20,000, which is the equity he has invested directly in his property.