Final answer:
Very small companies prefer raising funds through private investors to avoid complexities of IPOs. Small firms may opt for an IPO due to liquidity and potential capital increase without debt repayment. Venture capitalists usually have better profitability insights compared to bondholders due to their active involvement and due diligence.
Step-by-step explanation:
Early-Stage Corporate Finance Questions
In early-stage corporate finance, very small companies often raise money from private investors rather than going through an IPO because IPOs are costly and complex, and require a level of transparency and regulation that small companies may not be ready for. Moreover, small companies may not have enough presence or proven track records to attract public investors.
Conversely, small, young companies may prefer an IPO as it can provide a large influx of capital without the need to repay debts or the interest associated with bank loans and bonds. An IPO offers liquidity and can help raise a company's public profile.
Regarding information on the profitability of a small firm, a venture capitalist typically has better insight than a potential bondholder. This is due to the VC's active role in the company, providing not just money but also expertise and oversight. They perform due diligence, which gives them access to detailed information about the company's operations and potential.
Bonds and bank loans are similar from a firm's standpoint because both involve borrowing money that must be repaid with interest. However, they differ in terms of collateral requirements, flexibility, interest rates, and the impact on cash flow.
For calculating equity in a home: if Fred bought a house for $200,000 and made a 10% down payment, his equity would be the down payment amount. So, Fred would have $20,000 of equity in his home.