Final answer:
An entrepreneur should ask about their skills and experience, demand for their product or service, and potential return on investment before starting a venture. Very small companies raise funds from private investors due to the cost and complexity of an IPO, while venture capitalists generally have better information about a startup's profitability than bondholders. Equity, IPO, and financing decisions are integral to early-stage corporate finance.
Step-by-step explanation:
Before starting a venture, every entrepreneur should ask several crucial questions to evaluate their business idea and its potential success in the market. The three questions that could be considered most crucial are:
- Do I have the necessary skills and experience?
- Is there a demand for my product or service?
- What is the potential return on investment?
These questions address the entrepreneur's qualifications, market demand, and financial expectations, which are essential for making an informed decision about pursuing a business opportunity.
Answers to Early-Stage Corporate Finance Questions
a. Very small companies tend to raise money from private investors because of the high costs and regulatory requirements of an Initial Public Offering (IPO), which can be prohibitive for smaller entities.
b. Small, young companies might prefer an IPO over borrowing from a bank or issuing bonds because it can provide a larger amount of capital and does not require repayment or interest payments like debt financing does.
c. A venture capitalist typically has better information about whether a small firm is likely to earn profits compared to a potential bondholder because they conduct more thorough due diligence, often have specialized experience, and may be involved in the company's management.
Comparison of Bonds and Bank Loans
From a firm's perspective, a bond is similar to a bank loan in that both are forms of debt that require periodic interest payments and the repayment of principal. However, they differ as bonds can be traded on the open market and have a wider pool of potential investors, whereas a loan is a more direct agreement with a bank.
Calculating Home Equity
Fred's initial equity in his $200,000 house is the amount of his down payment, which is 10% of the purchase price. Therefore, Fred's initial equity is $20,000.