Final answer:
In summary, very small companies prefer private investment over IPOs due to lower costs and fewer regulations. IPOs provide more capital and liquidity than bank loans for smaller firms, and venture capitalists typically have better insight into a company's profitability than bondholders.
Step-by-step explanation:
Understanding Corporate Finance in Early-Stage Companies
To address the questions related to early-stage corporate finance:
Private investors vs IPO: Very small companies often raise money from private investors rather than through an Initial Public Offering (IPO) because they may not meet the regulatory and financial requirements for going public, and the costs associated with an IPO can be prohibitively high. Private investment also allows for more direct relationships with investors who may bring added value beyond just capital.
IPO vs Bank Loan: Small, young companies may prefer an IPO over borrowing from a bank or issuing bonds as it allows them to raise a significant amount of capital, potentially more than what a bank might be willing to lend. An IPO can also provide liquidity for early investors and the prestige of being a public company may aid in business relations.
Venture Capitalists vs Bondholders: A venture capitalist likely has better information about whether a small firm is likely to earn profits compared to a potential bondholder. This is because venture capitalists typically engage in due diligence and may take an active role in the firm's management, hence obtaining an in-depth understanding of the company's potential and risks.
Bonds vs Bank Loans: From a firm's point of view, a bond is similar to a bank loan in that both are methods of raising capital that require repayment with interest. However, bonds are traded on the open market, which can affect their pricing, while bank loans are typically private agreements with fixed terms. Additionally, bonds may impose fewer restrictions on the company compared to bank loans, which often come with covenants.
Calculating Home Equity: Fred's equity in his home can be calculated by subtracting the amount owed on the mortgage from the home's market value. With a home valued at $200,000 and a 10% down payment, Fred would have put down $20,000. Therefore, Fred's initial equity is $20,000.