CreatedrBy:rArSolution
SOLUTION MANUAL FOR Entrepreneurial Finance, 7th Ed
r r r r r r
ition by J. Chris Leach, Ronald W. Melicher Chapter 1-
r r r r r r r r r
16 With Cases Products &Spatial Tech A+
r r r r r r
Chapterr1
INTRODUCTIONrTOrFINANCErFORrENTREPRENEURSrFOCUS
Therpurposerofrthisrfirstrchapterrisrtorpresentranroverviewrofrwhatrentrepreneurialrfinancerisrabout.rInr
doingrsorwerhopertorconveyrtoryourtherimportancerofrunderstandingrandrapplyingrentrepreneurialrfin
ancermethodsrandrtoolsrtorhelprensureranrentrepreneurialrventurerisrsuccessful.rWerpresentrarlifercycl
erapproachrtortherteachingrofrentrepreneurialrfinancerwhererwercoverrventureroperatingrandrfinancialr
decisionsrfacedrbyrtherentrepreneurrasrarventurerprogressesrfromranridearthroughrtorharvestingrtherve
nture.
LEARNINGrOBJECTIVES
LOr1.1:rCharacterizertherentrepreneurialrprocess.
LOr1.2:rDescriberentrepreneurshiprandrsomercharacteristicsrofrentrepreneurs.
LOr1.3:rIndicaterseveralrmegatrendsrprovidingrwavesrofrentrepreneurialropportunities.rLOr1.4:rListra
ndrdescriberthersevenrprinciplesrofrentrepreneurialrfinance.
LOr1.5:rDiscussrentrepreneurialrfinancerandrtherrolerofrtherfinancialrmanager.rLOr1.6:rDescribertherv
ariousrstagesrofrarsuccessfulrventure‘srlifercycle.
LOr1.7:rIdentify,rbyrlifercyclerstage,rtherrelevantrtypesrofrfinancingrandrinvestors.rLOr1.8:rUnderstan
drtherlifercyclerapproachrusedrinrthisrbook.
CHAPTERrOUTLINE
1.1 THErENTREPRENEURIALrPROCESS
1.2 ENTREPRENEURSHIPrFUNDAMENTALS
A. WhorisranrEntrepreneur?
B. BasicrDefinitions
C. EntrepreneurialrTraitsrorrCharacteristics
D. OpportunitiesrExistrButrNotrWithoutrRisks
1.3 SOURCESrOFrENTREPRENEURIALrOPPORTUNITIES
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A. SocietalrChanges
B. DemographicrChanges
C. TechnologicalrChanges
D. EmergingrEconomiesrandrGlobalrChanges
E. Crisesrandr―Bubbles‖
F. DisruptiverInnovation
1
r
1.4 PRINCIPLESrOFrENTREPRENEURIALrFINANCE
A. Real,rHuman,randrFinancialrCapitalrmustrberRentedrfromrOwnersr(Principler#1)
B. RiskrandrExpectedrRewardrgorHandrinrHandr(Principler#2)
C. WhilerAccountingrisrtherLanguagerofrBusiness,rCashrisrtherCurrencyr(Principler#3)
D. NewrVenturerFinancingrInvolvesrSearch,rNegotiation,randrPrivacyr(Principler#4)
E. ArVenture‘srFinancialrObjectiverisrtorIncreaserValuer(Principler#5)
F. ItrisrDangerousrtorAssumerthatrPeoplerActrAgainstrTheirrOwnrSelf-Interestsr(Principler#6)
G. VenturerCharacterrandrReputationrcanrberAssetsrorrLiabilitiesr(Principler#7)
1.5 ROLErOFrENTREPRENEURIALrFINANCE
1.6 THErSUCCESSFULrVENTURErLIFErCYCLE
A. DevelopmentrStage
B. StartuprStage
C. SurvivalrStage
D. Rapid-GrowthrStage
E. Early-MaturityrStage
F. LiferCyclerStagesrandrtherEntrepreneurialrProcess
1.7 FINANCINGrTHROUGHrTHErVENTURErLIFErCYCLE
A. SeedrFinancing
B. StartuprFinancing
C. First-RoundrFinancing
D. Second-RoundrFinancing
E. MezzaninerFinancing
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F. Liquidity-StagerFinancing
G. SeasonedrFinancing
1.8
LIFErCYCLErAPPROACHrFORrTEACHINGrENTREPRENEURIALrFINANCErSUMM
ARY
DISCUSSIONrQUESTIONSrANDrANSWERS
1. Whatrisrtherentrepreneurialrprocess?
Therentrepreneurialrprocessrcomprises:rdevelopingropportunities,rgatheringrresources,randrmanagin
grandrbuildingroperationsrwithrthergoalrofrcreatingrvalue.
2. Whatrisrentrepreneurship?rWhatrarersomerbasicrcharacteristicsrofrentrepreneurs?
Entrepreneurshiprisrtherprocessrofrchangingrideasrintorcommercialropportunitiesrandrcreatingrvalue.r
Whilerthererisrnorprototypicalrentrepreneur,rmanyrarergoodratrrecognizingrcommercialropportunities
,rtendrtorberoptimistic,randrenvisionrarplanrforrtherfuture.
3.
Whyrdorbusinessesrcloserorrceaseroperating?rWhatrarertherprimaryrreasonsrwhyrbusinessesrfa
il?
r
Nearlyrone-
halfrofrbusinessesrthatrfailrdorsorbecauserofreconomicrfactorsrincludingrinadequatersales,rinsufficientr
profits,randrindustryrweakness.rManyrofrthereconomicrfactorsrarerdirectlyrtiedrtorfinancingrconcernsr(
e.g.,rinsufficientrprofitsrforrinvestors).rAlmostr40rpercentrofrbusinessrfailuresrnotrcitingreconomicrfac
torsrciterspecificallyrfinancialrcausesrlikerexcessiverdebtrandrinsufficientrfinancialrcapital.rTherremai
ningrcitedrreasonsrforrfailurerincluderarlackrofrbusinessrandrmanagerialrexperience,rbusinessrconflict
s,rfamilyrproblems,rfraud,randrdisasters.rManyrbusinessesrcloserandrfailrduertorfinancialrtroublerwhic
hrisrmostlyrrelatedrtorlackrofrsalesrandrunsatisfactoryrprofits.
4. Whatrarerfivermegatrendrsourcesrorrcategoriesrforrfindingrentrepreneurialropportunities?
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, CreatedrBy:rArSolution
Weridentifyrfivermegatrendrcategories.rTheyrare:r(1)rsocietalrchanges,r(2)rdemographicrchanges,r(3)r
technologicalrchanges,r(4)remergingreconomiesrandrglobalrchanges,randr(5)rcrisesrandrbubbles.
Underrsocietalrchangesrwerdiscussrthergigreconomyrandrthersharingreconomy.rThergigreconomyrisrw
hererindividualsracceptrshort-termrjobrassignmentsrorr―gigs‖rinsteadrofrhavingrfull-
timeremployment.rThersharingreconomyrisrwhererindividualsrsharertheirrassets,rsuchrasrhomes,rvehic
les,randrpersonalrtime,rwithrothersrtorproviderarnewrwayrforrdistributingrgoodsrandrservices.
5.
Whatrassetrandrfinancialrbubblesrhaveroccurredrrecently?rHowrcanrbubblesrandrfinancialrcris
esrleadrtorentrepreneurialropportunities?
Ther―dot.com‖rorrInternetrbubblerburstrinr2000.rAnreconomicrrecessionrthatrbeganrinr2001rwasrexac
erbatedrbyrther9/11rterroristrattack.rTherhousingrassetrbubble,rfueledrbyrsub-
primermortgagesrofferedrtorborrowersrwhorcouldrnotraffordrthem,rburstrinr2006.rByrthersecondrhalfro
fr2008,rar―perfectrfinancialrstorm‖reruptedrandrpossiblerfinancialrcollapserbecamerarreality.
Alternativerandrrenewablerenergy,raccompaniedrbyrprojectrcreditrsubsidies,rproductionrandrinvestm
entrtaxrcredits,randrloanrguaranteesrbenefitedrasrarresultrofrtherrecentrfinancialrcrisis.rTheserdevelopm
entsrandrotherreffortsrtorstimulatereconomicractivityrprovidedrmanyrnewrentrepreneurialropportuniti
es.
6. Whatrisre-commerce?rWhyrarertherInternetreconomyrandre-commercerherertorstay?
E-
commercerinvolvesrtheruserofrelectronicrmeansrtorconductrbusinessronline.rActivitiesrincludermarket
ingrandrsellingronlinerandrelectronicrretailing.
Therinternetreconomyrandre-
commercerarerherertorstay.rWerwillrneverrdorbusinessrthersamerwayrwerdidrbeforertherInternetrandrthe
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SOLUTION MANUAL FOR Entrepreneurial Finance, 7th Ed
r r r r r r
ition by J. Chris Leach, Ronald W. Melicher Chapter 1-
r r r r r r r r r
16 With Cases Products &Spatial Tech A+
r r r r r r
Chapterr1
INTRODUCTIONrTOrFINANCErFORrENTREPRENEURSrFOCUS
Therpurposerofrthisrfirstrchapterrisrtorpresentranroverviewrofrwhatrentrepreneurialrfinancerisrabout.rInr
doingrsorwerhopertorconveyrtoryourtherimportancerofrunderstandingrandrapplyingrentrepreneurialrfin
ancermethodsrandrtoolsrtorhelprensureranrentrepreneurialrventurerisrsuccessful.rWerpresentrarlifercycl
erapproachrtortherteachingrofrentrepreneurialrfinancerwhererwercoverrventureroperatingrandrfinancialr
decisionsrfacedrbyrtherentrepreneurrasrarventurerprogressesrfromranridearthroughrtorharvestingrtherve
nture.
LEARNINGrOBJECTIVES
LOr1.1:rCharacterizertherentrepreneurialrprocess.
LOr1.2:rDescriberentrepreneurshiprandrsomercharacteristicsrofrentrepreneurs.
LOr1.3:rIndicaterseveralrmegatrendsrprovidingrwavesrofrentrepreneurialropportunities.rLOr1.4:rListra
ndrdescriberthersevenrprinciplesrofrentrepreneurialrfinance.
LOr1.5:rDiscussrentrepreneurialrfinancerandrtherrolerofrtherfinancialrmanager.rLOr1.6:rDescribertherv
ariousrstagesrofrarsuccessfulrventure‘srlifercycle.
LOr1.7:rIdentify,rbyrlifercyclerstage,rtherrelevantrtypesrofrfinancingrandrinvestors.rLOr1.8:rUnderstan
drtherlifercyclerapproachrusedrinrthisrbook.
CHAPTERrOUTLINE
1.1 THErENTREPRENEURIALrPROCESS
1.2 ENTREPRENEURSHIPrFUNDAMENTALS
A. WhorisranrEntrepreneur?
B. BasicrDefinitions
C. EntrepreneurialrTraitsrorrCharacteristics
D. OpportunitiesrExistrButrNotrWithoutrRisks
1.3 SOURCESrOFrENTREPRENEURIALrOPPORTUNITIES
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,CreatedrBy:rArSolution
A. SocietalrChanges
B. DemographicrChanges
C. TechnologicalrChanges
D. EmergingrEconomiesrandrGlobalrChanges
E. Crisesrandr―Bubbles‖
F. DisruptiverInnovation
1
r
1.4 PRINCIPLESrOFrENTREPRENEURIALrFINANCE
A. Real,rHuman,randrFinancialrCapitalrmustrberRentedrfromrOwnersr(Principler#1)
B. RiskrandrExpectedrRewardrgorHandrinrHandr(Principler#2)
C. WhilerAccountingrisrtherLanguagerofrBusiness,rCashrisrtherCurrencyr(Principler#3)
D. NewrVenturerFinancingrInvolvesrSearch,rNegotiation,randrPrivacyr(Principler#4)
E. ArVenture‘srFinancialrObjectiverisrtorIncreaserValuer(Principler#5)
F. ItrisrDangerousrtorAssumerthatrPeoplerActrAgainstrTheirrOwnrSelf-Interestsr(Principler#6)
G. VenturerCharacterrandrReputationrcanrberAssetsrorrLiabilitiesr(Principler#7)
1.5 ROLErOFrENTREPRENEURIALrFINANCE
1.6 THErSUCCESSFULrVENTURErLIFErCYCLE
A. DevelopmentrStage
B. StartuprStage
C. SurvivalrStage
D. Rapid-GrowthrStage
E. Early-MaturityrStage
F. LiferCyclerStagesrandrtherEntrepreneurialrProcess
1.7 FINANCINGrTHROUGHrTHErVENTURErLIFErCYCLE
A. SeedrFinancing
B. StartuprFinancing
C. First-RoundrFinancing
D. Second-RoundrFinancing
E. MezzaninerFinancing
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F. Liquidity-StagerFinancing
G. SeasonedrFinancing
1.8
LIFErCYCLErAPPROACHrFORrTEACHINGrENTREPRENEURIALrFINANCErSUMM
ARY
DISCUSSIONrQUESTIONSrANDrANSWERS
1. Whatrisrtherentrepreneurialrprocess?
Therentrepreneurialrprocessrcomprises:rdevelopingropportunities,rgatheringrresources,randrmanagin
grandrbuildingroperationsrwithrthergoalrofrcreatingrvalue.
2. Whatrisrentrepreneurship?rWhatrarersomerbasicrcharacteristicsrofrentrepreneurs?
Entrepreneurshiprisrtherprocessrofrchangingrideasrintorcommercialropportunitiesrandrcreatingrvalue.r
Whilerthererisrnorprototypicalrentrepreneur,rmanyrarergoodratrrecognizingrcommercialropportunities
,rtendrtorberoptimistic,randrenvisionrarplanrforrtherfuture.
3.
Whyrdorbusinessesrcloserorrceaseroperating?rWhatrarertherprimaryrreasonsrwhyrbusinessesrfa
il?
r
Nearlyrone-
halfrofrbusinessesrthatrfailrdorsorbecauserofreconomicrfactorsrincludingrinadequatersales,rinsufficientr
profits,randrindustryrweakness.rManyrofrthereconomicrfactorsrarerdirectlyrtiedrtorfinancingrconcernsr(
e.g.,rinsufficientrprofitsrforrinvestors).rAlmostr40rpercentrofrbusinessrfailuresrnotrcitingreconomicrfac
torsrciterspecificallyrfinancialrcausesrlikerexcessiverdebtrandrinsufficientrfinancialrcapital.rTherremai
ningrcitedrreasonsrforrfailurerincluderarlackrofrbusinessrandrmanagerialrexperience,rbusinessrconflict
s,rfamilyrproblems,rfraud,randrdisasters.rManyrbusinessesrcloserandrfailrduertorfinancialrtroublerwhic
hrisrmostlyrrelatedrtorlackrofrsalesrandrunsatisfactoryrprofits.
4. Whatrarerfivermegatrendrsourcesrorrcategoriesrforrfindingrentrepreneurialropportunities?
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, CreatedrBy:rArSolution
Weridentifyrfivermegatrendrcategories.rTheyrare:r(1)rsocietalrchanges,r(2)rdemographicrchanges,r(3)r
technologicalrchanges,r(4)remergingreconomiesrandrglobalrchanges,randr(5)rcrisesrandrbubbles.
Underrsocietalrchangesrwerdiscussrthergigreconomyrandrthersharingreconomy.rThergigreconomyrisrw
hererindividualsracceptrshort-termrjobrassignmentsrorr―gigs‖rinsteadrofrhavingrfull-
timeremployment.rThersharingreconomyrisrwhererindividualsrsharertheirrassets,rsuchrasrhomes,rvehic
les,randrpersonalrtime,rwithrothersrtorproviderarnewrwayrforrdistributingrgoodsrandrservices.
5.
Whatrassetrandrfinancialrbubblesrhaveroccurredrrecently?rHowrcanrbubblesrandrfinancialrcris
esrleadrtorentrepreneurialropportunities?
Ther―dot.com‖rorrInternetrbubblerburstrinr2000.rAnreconomicrrecessionrthatrbeganrinr2001rwasrexac
erbatedrbyrther9/11rterroristrattack.rTherhousingrassetrbubble,rfueledrbyrsub-
primermortgagesrofferedrtorborrowersrwhorcouldrnotraffordrthem,rburstrinr2006.rByrthersecondrhalfro
fr2008,rar―perfectrfinancialrstorm‖reruptedrandrpossiblerfinancialrcollapserbecamerarreality.
Alternativerandrrenewablerenergy,raccompaniedrbyrprojectrcreditrsubsidies,rproductionrandrinvestm
entrtaxrcredits,randrloanrguaranteesrbenefitedrasrarresultrofrtherrecentrfinancialrcrisis.rTheserdevelopm
entsrandrotherreffortsrtorstimulatereconomicractivityrprovidedrmanyrnewrentrepreneurialropportuniti
es.
6. Whatrisre-commerce?rWhyrarertherInternetreconomyrandre-commercerherertorstay?
E-
commercerinvolvesrtheruserofrelectronicrmeansrtorconductrbusinessronline.rActivitiesrincludermarket
ingrandrsellingronlinerandrelectronicrretailing.
Therinternetreconomyrandre-
commercerarerherertorstay.rWerwillrneverrdorbusinessrthersamerwayrwerdidrbeforertherInternetrandrthe
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