Final answer:
The value of a firm's equity after raising funds from equity holders depends on expected returns minus the initial investment, while the value of debt considers factors like interest rates and creditworthiness. Bonds and bank loans both raise capital but differ in terms of trading and investor base. Equity in a home is calculated as the market value minus what is still owed to the bank.
Step-by-step explanation:
Understanding Equity and Debt in Corporate Finance
When a firm raises money from equity holders to develop land or undertake a new project, the value of the firm's equity essentially depends on the new project's expected returns minus the initial investment. However, without specific numbers regarding the expected returns, costs associated with the project, and current market conditions, it's impossible to determine the exact value of the firm's equity after such an investment. Assessing the value of the firm's debt depends on various factors like interest rates, the firm's creditworthiness, and market conditions as well.
From a firm's perspective, a bond is similar to a bank loan because both are methods of raising capital that require regular interest payments and have a maturity date. However, they differ in that bonds are tradable instruments that can be sold to investors in public markets, while bank loans are typically negotiated privately between the firm and a financial institution. Bonds also generally have broader investor bases and potentially more diversified risk.
When it comes to calculating equity in a home, it is the market value of the property minus the remaining balance owed on the mortgage. For example, Eva's equity in her $200,000 house, where she put 10% down and borrowed the rest, is $20,000 because she has financed the remaining $180,000 and thus her initial equity is her down payment.