1. Answer these three questions about early-stage corporate finance: 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?