Final answer:
When considering financing options for Babycare Ltd., one must weigh the benefits of private investors, IPOs, venture capital, and bonds. Private investors and venture capitalists typically provide better information and involvement in small firms, while IPOs can offer significant capital and prestige for growth. Bonds and loans are similar debt instruments but differ in trading and terms.
Step-by-step explanation:
Evaluating financing options for a company requires understanding the advantages and disadvantages of different sources of capital. For very small companies, raising money from private investors tends to be preferable over an initial public offering (IPO) because it allows for simpler, more direct negotiations and avoids the regulatory complexities and costs associated with going public. On the other hand, small but growing companies may favor an IPO since it can provide a large influx of capital, enhanced public profile, and elevated status, which can be beneficial for further growth and operations.
Venture capitalists generally have better information about a small firm's likelihood to earn profits compared to potential bondholders. The reason for this is that venture capitalists often take an active role in the businesses they invest in and perform detailed due diligence before investing. They also continuously monitor the operations and may even take part in decision-making.
From a firm's point of view, a bond is similar to a bank loan in that both are forms of debt that the company must repay with interest. However, they differ significantly in terms of structure, flexibility, and market exposure. Bonds are traded on the open market, while bank loans are typically held by the lending institution.
As for equity in a home, for Fred who bought a house for $200,000 with a 10% down payment, his equity would be his down payment amount because that is the portion of the home's value he owns outright.