Question

An investment banking doing due diligence on a target company would be least likely to interview which of the following individuals?

a) The target company's largest company
b) The target company's largest supplier
c) The target company's largest shareholder
d) an executive of the target company

Answer 1

An investment bank is least likely to interview the target company's largest shareholder during due diligence, as they may not have detailed operational insights. In early-stage corporate finance, small companies opt for private investors or IPOs due to cost, regulations, and financial flexibility. Venture capitalists have better profit earning information for small firms than bondholders due to closer company involvement.

Step-by-step explanation:

During the due diligence process of an investment banking firm evaluating a target company, it is least likely that they would interview the target company's largest shareholder. While the largest supplier, customer, and company executives can offer valuable insights into the company's operations, financial health, and business relationships, the largest shareholder may not be involved in the day-to-day operations and thus may not provide the level of detail the investment bank requires.

Early-stage Corporate Finance

1. Very small companies raise money from private investors instead of through an IPO because it's less expensive, less regulated, and allows them to obtain funding without the need to disclose sensitive information publicly.
2. Small, young companies often prefer an IPO to borrowing from a bank or issuing bonds to avoid the obligation of regular interest payments and to enjoy the potential of raising more capital from a wider investor base.
3. A venture capitalist typically has better information about a small firm's potential to earn profits compared to a potential bondholder. This is due to their close involvement with the company's management and strategy, which minimizes the issues of imperfect information.

Bond and bank loans both require fixed payments and affect the company's cash flow. However, they differ in that bonds are traded on public markets and can be bought by many investors, whereas a bank loan is a private agreement between the firm and the financial institution. Additionally, bonds generally offer more flexibility in terms and can have less restrictive covenants than bank loans.

Home Equity Calculation

Fred purchased a house for $200,000 with a 10% down payment, leaving him with an initial equity of $20,000.