Final answer:
It is not appropriate to include a short-term obligation in owners' equity when refinancing is expected through equity issuance; it remains a liability. Small companies raise funds through private investors or an IPO depending on maturity, and firms may choose bonds or bank loans for distinct reasons. For instance, Eva's initial home equity would be her down payment of $20,000 on a $200,000 house purchase.
Step-by-step explanation:
When considering the question of whether it is appropriate to include a short-term obligation in owners' equity when refinancing is expected to be accomplished through the issuance of equity securities, the answer is False. Short-term obligations should be reported as liabilities until the actual equity financing occurs and the debt is extinguished.
Early-stage corporate finance sees firms choosing different methods for raising capital based on their development stages and financial goals. Very small companies tend to raise money from private investors because they may not have the resources or the attractiveness for an Initial Public Offering (IPO). On the other hand, an IPO might be preferred by small, young companies looking to gain access to broader capital markets and enhance their visibility while avoiding the need to make regular interest payments as opposed to borrowing from a bank or issuing bonds.
From a firm's perspective, a bond and a bank loan are similar in that they both represent a form of borrowing and require the firm to make regular interest payments. However, they differ in terms of the administrative process, repayment terms, and potential early repayment costs. Additionally, bonds usually involve the public investors, while bank loans are negotiated privately with a financial institution.
For example, if Eva just bought a house for $200,000 and put a 10% down payment, the initial equity in her home would be $20,000, which is the down payment amount.