# Answer these three questions about early-stage corporate finance: a. Why do very small companies…

a. Why do very small companies tend to raise money from private investors instead of through an IPO?

b. Why do small, young companies often prefer an IPO to borrowing from a bank or issuing bonds?

c. Who has better information about whether a small firm is likely to earn profits, a venture capitalist or a potential bondholder, and why?

2. Calculate the equity each of these people has in his or her home:

a. Fred just bought a house for \$200,000 by putting 10% as a down payment and borrowing the rest from the bank.

b. Freda bought a house for \$150,000 in cash, but if she were to sell it now, it would sell for \$250,000.

c. Frank bought a house for \$100,000. He put 20% down and borrowed the rest from the bank. However, the value of the house has now increased to \$160,000 and he has paid off \$20,000 of the bank loan.

3. Which has a higher average return over time: stocks, bonds, or a savings account? Explain your answer.

4. Investors sometimes fear that a high-risk investment is especially likely to have low returns. Is this fear true? Does a high risk mean the return must be low?

5. You open a 5-year CD for \$1,000 that pays 2% interest, compounded annually. What is the value of that CD at the end of the 5 years?

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