Principles of Economics 2e
Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
Textbook Question
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Chapter 17, Problem 1SCQ

Answer these three questions about early-stage corporate finance:

  1. Why do very small companies tend to raise money from private investors instead of through an IPO?
  2. Why do small, young companies often prefer an IPO to borrowing from a bank or issuing bonds?
  3. Who has better information about whether a small firm is likely to earn profits, a venture capitalist or a potential bondholder, and why?

Expert Solution
Check Mark
To determine

(a)

The reason for small companies raising funds from private investors instead of IPO is to be determined.

Explanation of Solution

The small companies tend to raise money from private investors instead of through an IPO because of the fact that small companies are new, and they do not have any image in the market as a new entrant. Public will buy shares in IPO only when public knows about the company. Therefore, primarily they approach private investor than they start their business and establish name in the market.

Economics Concept Introduction

Early-Stage Financial Capital: the firms which have just started their business often have an idea for the product and services to sell. Since the firm is new in the market, hence have only a few customers or no customers at all. Thus, firms face difficulties in raising funds at an early stage.

Expert Solution
Check Mark
To determine

(b)

The reason for small and young companies preferring an IPO then borrowing from a bank or by issuing bonds is to be determined.

Explanation of Solution

Prefer an IPO is a low-cost funding as compared to banks or issuing bonds banks will charge high interest rates and issuing bonds will make a permanent liability to pay coupon payment in a period of time. Hence IPO is the Best route.

Economics Concept Introduction

Early-Stage Financial Capital: the firms which have just started their business often have an idea for the product and services to sell. Since the firm is new in the market, hence have only a few customers or no customers at all. Thus, firms face difficulties in raising funds at an early stage.

Expert Solution
Check Mark
To determine

(c)

Whether a venture capitalist or a potential bondholder has better information about whether a small firm is likely to earn profits.

Explanation of Solution

The Venture Capitalist will have better knowledge because he knows all the ins and outs of business model, profitability of operations, intent of the management.

Economics Concept Introduction

Early-Stage Financial Capital: the firms which have just started their business often have an idea for the product and services to sell. Since the firm is new in the market, hence have only a few customers or no customers at all. Thus, firms face difficulties in raising funds at an early stage.

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Chapter 17 Solutions

Principles of Economics 2e

Ch. 17 - Why are banks more willing to lend to...Ch. 17 - What is a bond?Ch. 17 - What does a share of stock represent?Ch. 17 - When do firms receive money from a stock sale in...Ch. 17 - What is a dividend?Ch. 17 - What is a capital gain?Ch. 17 - What is the difference between a private company...Ch. 17 - How do the shareholders who own a company choose...Ch. 17 - Why are banks called financial intermediaries?Ch. 17 - Name several different kinds of bank account. How...Ch. 17 - Why are bonds somewhat risky to buy, even though...Ch. 17 - Why should a financial investor care about...Ch. 17 - What is a mutual fund?Ch. 17 - What is an index fund?Ch. 17 - How is buying a house to live in a type of...Ch. 17 - Why is it hand to forecast future movements in...Ch. 17 - What are the two key choices U.S. citizens need to...Ch. 17 - Is investing in housing always a very safe...Ch. 17 - If you owned a small firm that had become somewhat...Ch. 17 - Explain how a company can fail when the safeguards...Ch. 17 - What are some reasons why the investment strategy...Ch. 17 - Explain why a financial investor in stocks cannot...Ch. 17 - Explain what happens in an economy when the...Ch. 17 - You and your friend have opened an account on...Ch. 17 - How do bank failures cause the economy to go into...Ch. 17 - The Darkroom Windowshade Company has 100,000...Ch. 17 - Imagine that a local water company issued 10,000...Ch. 17 - Suppose Ford Motor Company issues a five year bond...Ch. 17 - How much money do you have to put into a bank...Ch. 17 - Many retirement funds charge an administrative fee...
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