Question

1. Three questions about early stage corporate finance:

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

b. Why do small, young companies as they grow oftenprefer an IPO to borrowing from a bank or issuing bonds?

c. Who has better information about whether a small firm islikely to earn profits, a venture capitalist or a potentialbondholder, and why?

Answer 1

ans....

a. Just because of the fact that they 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 there business and establish name in the market.

b. 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.

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