Final answer:
In early-stage corporate finance, small companies prefer private investors over IPOs due to cost, and IPOs over loans for capital access without debt. Venture capitalists usually have better profit insights than bondholders, and bonds differ from bank loans in market presence. Fred's home equity would be his $20,000 down payment.
Step-by-step explanation:
Early-Stage Corporate Finance
When assessing the landscape of early-stage corporate finance, several key questions come into focus regarding the capital-raising strategies of small companies. Here is a breakdown of these considerations:
- Private investors versus IPO: Very small companies often turn to private investors since initial public offerings (IPOs) come with significant regulatory hurdles and costs, which can be prohibitive for a business still gaining ground.
- IPO benefits: Compared to debt financing through banks or bonds, an IPO can provide a small, growing company with greater access to capital without the need to service debt, thus avoiding interest payments.
- Venture capitalist versus bondholder information asymmetry: A venture capitalist typically has better insight into the profit potential of a small firm due to a closer working relationship and active involvement in the firm, contrasting with a potential bondholder who has less direct access to such in-depth company information.
Bonds Versus Bank Loans
From a firm's perspective, a bond is similar to a bank loan as both are forms of debt financing requiring payment of principal and interest. However, they diverge in their structure; bonds are generally traded on markets and involve many investors, whereas a bank loan is a more private agreement between the firm and a single financial institution.
Calculating Home Equity
If Fred purchased a home for $200,000 with a 10% down payment, his initial equity would be $20,000, equating to the amount of the down payment. The remaining $180,000 would be financed through the bank loan, representing the debt against the home's value.