Final answer:
Solvency ratios are the best type of financial ratios to measure the extent to which a firm has been financed by debt. These ratios, such as the debt-to-equity ratio, provide insights into a company's long-term debt obligations and financial leverage.
Step-by-step explanation:
The types of ratios that give the best indication of the extent to which a firm has been financed by debt are 4) solvency ratios. Solvency ratios measure a company's ability to meet its long-term obligations and include metrics such as the debt-to-equity ratio, the interest coverage ratio, and the debt ratio. These ratios help investors and analysts understand the proportion of debt used in a firm's financing structure and assess the risk associated with the firm's solvency.
Early-stage corporate finance involves decisions that new companies make about raising money. Very small companies often raise funds from private investors because it's more accessible and requires less regulatory compliance than an Initial Public Offering (IPO). Young companies might prefer an IPO for the potential to raise larger amounts of capital and to establish a market valuation. A venture capitalist typically has better information about a small firm's profit potential than a bondholder because they are more directly involved in the business and often provide strategic guidance. For firms, bonds are similar to bank loans in that they both represent a debt obligation. However, bonds are typically traded in financial markets, can be issued to a wide investor base, and usually have fixed interest payments, while loans are more direct agreements with a financial institution, may have adjustable interest terms, and are not publicly traded.
As for the equity calculation, if Fred bought a house for $200,000 and made a 10% down payment, his down payment would be $20,000. The amount borrowed from the bank would be $180,000, which means Fred's initial equity in the home is equivalent to his down payment, so he has $20,000 in equity.