Final answer:
The correct statement for a levered firm is that it has a higher risk compared to an unlevered firm. A levered firm includes debt which increases both potential return on equity and financial risk. Also discussed are reasons behind the financing choices of small firms, similarities and differences between bonds and bank loans, and calculation of home equity.
Step-by-step explanation:
The correct statement for a levered firm is that the firm has a higher risk compared to an unlevered firm. In the context of corporate finance, a levered firm includes debt in its capital structure, which increases the potential return on equity due to the tax deductibility of interest payments, but also increases financial risk.
Addressing some early-stage corporate finance questions: Very small companies tend to raise money from private investors instead of through an IPO because they are too small to bear the costs and may not attract sufficient interest in the public market. Small, young companies often prefer an IPO to borrowing because it can provide larger amounts of capital without the need to make interest payments, although it implies sharing control of the company with public shareholders. A venture capitalist is likely to have better information about whether a small firm is likely to earn profits compared to a potential bondholder due to closer involvement and access to inside information.
From a firm's perspective, a bond is similar to a bank loan in that both require scheduled repayments and interest payments. However, they are different in terms of the flexibility of terms, the security needed, and the administrative process involved in issuance.
Calculating equity in a home, if Fred put a 10% down payment on a $200,000 house, his initial equity in the home is $20,000.