Final answer:
To answer the student's question, the times interest earned ratio is the ratio that would not be used to measure the extent of a firm's debt financing. It is a measure of a firm's ability to meet interest payments, not the level of debt financing.
Step-by-step explanation:
To measure the extent of a firm's debt financing, several ratios can be employed, each providing insight into different aspects. The debt ratio, debt to equity ratio, and long-term debt to total capitalization ratio directly relate to the debt structure and leverage of a company. However, the times interest earned ratio measures a company's ability to meet its debt obligations with its earnings and is therefore not directly a measure of the level of debt financing.
Answering the provided self-check questions about early-stage corporate finance
- Very small companies typically raise money from private investors rather than going through an Initial Public Offering (IPO) primarily because IPOs are complex, cost-intensive, and require a significant level of disclosure and regulation that small firms may not be prepared to handle.
- Small, young companies might prefer an IPO to borrowing from a bank or issuing bonds because it allows them to raise large amounts of capital without the obligation to make regular interest payments, amongst other strategic reasons.
- A venture capitalist would generally have better information about whether a small firm is likely to earn profits compared to a potential bondholder because venture capitalists are actively involved in the firm, often provide strategic guidance, and have a detailed understanding of the business's operations and potential.
A bond and a bank loan are similar from a firm’s perspective in that they both involve receiving funds that require repayment with interest. They differ in that a bond is a source of capital raised through investors in the financial markets and usually involves fixed payments, whereas a bank loan is a more direct form of borrowing from a financial institution and may have more flexible terms.
Equity calculation example: If Eva just bought a house for $200,000 by down paying 10% and borrowing the remainder, her down payment represents her initial equity. Therefore, Eva's equity in her home would be $20,000.