CreatedgBy:gAgSolution
SOLUTION MANUAL FOR Entrepreneurial Finance, 7th E
g g g g g g
dition by J. Chris Leach, Ronald W. Melicher Chapter 1-
g g g g g g g g g
16 With Cases Products &Spatial Tech A+
g g g g g g
Chapterg1
INTRODUCTIONgTOgFINANCEgFORgENTREPRENEURSgFOCUS
Thegpurposegofgthisgfirstgchaptergisgtogpresentgangoverviewgofgwhatgentrepreneurialgfinancegisgab
out.gIngdoinggsogweghopegtogconveygtogyougthegimportancegofgunderstandinggandgapplyinggentrep
reneurialgfinancegmethodsgandgtoolsgtoghelpgensuregangentrepreneurialgventuregisgsuccessful.gWeg
presentgaglifegcyclegapproachgtogthegteachinggofgentrepreneurialgfinancegwheregwegcovergventureg
operatinggandgfinancialgdecisionsgfacedgbygthegentrepreneurgasgagventuregprogressesgfromgangide
agthroughgtogharvestinggthegventure.
LEARNINGgOBJECTIVES
LOg1.1:gCharacterizegthegentrepreneurialgprocess.
LOg1.2:gDescribegentrepreneurshipgandgsomegcharacteristicsgofgentrepreneurs.
LOg1.3:gIndicategseveralgmegatrendsgprovidinggwavesgofgentrepreneurialgopportunities.gLOg1.4:g
Listgandgdescribegthegsevengprinciplesgofgentrepreneurialgfinance.
LOg1.5:gDiscussgentrepreneurialgfinancegandgthegrolegofgthegfinancialgmanager.gLOg1.6:gDescribe
gthegvariousgstagesgofgagsuccessfulgventure‘sglifegcycle.
LOg1.7:gIdentify,gbyglifegcyclegstage,gthegrelevantgtypesgofgfinancinggandginvestors.gLOg1.8:gUnd
erstandgtheglifegcyclegapproachgusedgingthisgbook.
CHAPTERgOUTLINE
1.1 THEgENTREPRENEURIALgPROCESS
1.2 ENTREPRENEURSHIPgFUNDAMENTALS
A. WhogisgangEntrepreneur?
B. BasicgDefinitions
C. EntrepreneurialgTraitsgorgCharacteristics
D. OpportunitiesgExistgButgNotgWithoutgRisks
1.3 SOURCESgOFgENTREPRENEURIALgOPPORTUNITIES
A+ Pageg1
,CreatedgBy:gAgSolution
A. SocietalgChanges
B. DemographicgChanges
C. TechnologicalgChanges
D. EmerginggEconomiesgandgGlobalgChanges
E. Crisesgandg―Bubbles‖
F. DisruptivegInnovation
1
g
1.4 PRINCIPLESgOFgENTREPRENEURIALgFINANCE
A. Real,gHuman,gandgFinancialgCapitalgmustgbegRentedgfromgOwnersg(Principleg#1)
B. RiskgandgExpectedgRewardggogHandgingHandg(Principleg#2)
C. WhilegAccountinggisgthegLanguagegofgBusiness,gCashgisgthegCurrencyg(Principleg#3)
D. NewgVenturegFinancinggInvolvesgSearch,gNegotiation,gandgPrivacyg(Principleg#4)
E. AgVenture‘sgFinancialgObjectivegisgtogIncreasegValueg(Principleg#5)
F. ItgisgDangerousgtogAssumegthatgPeoplegActgAgainstgTheirgOwngSelf-
Interestsg(Principleg#6)
G. VenturegCharactergandgReputationgcangbegAssetsgorgLiabilitiesg(Principleg#7)
1.5 ROLEgOFgENTREPRENEURIALgFINANCE
1.6 THEgSUCCESSFULgVENTUREgLIFEgCYCLE
A. DevelopmentgStage
B. StartupgStage
C. SurvivalgStage
D. Rapid-GrowthgStage
E. Early-MaturitygStage
F. LifegCyclegStagesgandgthegEntrepreneurialgProcess
1.7 FINANCINGgTHROUGHgTHEgVENTUREgLIFEgCYCLE
A. SeedgFinancing
B. StartupgFinancing
C. First-RoundgFinancing
D. Second-RoundgFinancing
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,CreatedgBy:gAgSolution
E. MezzaninegFinancing
F. Liquidity-StagegFinancing
G. SeasonedgFinancing
1.8
LIFEgCYCLEgAPPROACHgFORgTEACHINGgENTREPRENEURIALgFINANCEgSUMMARY
DISCUSSIONgQUESTIONSgANDgANSWERS
1. Whatgisgthegentrepreneurialgprocess?
Thegentrepreneurialgprocessgcomprises:gdevelopinggopportunities,ggatheringgresources,gandgmana
ginggandgbuildinggoperationsgwithgtheggoalgofgcreatinggvalue.
2. Whatgisgentrepreneurship?gWhatgaregsomegbasicgcharacteristicsgofgentrepreneurs?
Entrepreneurshipgisgthegprocessgofgchanginggideasgintogcommercialgopportunitiesgandgcreatinggva
lue.gWhilegtheregisgnogprototypicalgentrepreneur,gmanygareggoodgatgrecognizinggcommercialgopp
ortunities,gtendgtogbegoptimistic,gandgenvisiongagplangforgthegfuture.
3. Whygdogbusinessesgclosegorgceasegoperating?
gWhatgaregthegprimarygreasonsgwhygbusinessesgfail?
g
Nearlygone-
halfgofgbusinessesgthatgfailgdogsogbecausegofgeconomicgfactorsgincludingginadequategsales,ginsuffi
cientgprofits,gandgindustrygweakness.gManygofgthegeconomicgfactorsgaregdirectlygtiedgtogfinancin
ggconcernsg(e.g.,ginsufficientgprofitsgforginvestors).gAlmostg40gpercentgofgbusinessgfailuresgnotgci
tinggeconomicgfactorsgcitegspecificallygfinancialgcausesglikegexcessivegdebtgandginsufficientgfinan
cialgcapital.gThegremaininggcitedgreasonsgforgfailuregincludegaglackgofgbusinessgandgmanagerialge
xperience,gbusinessgconflicts,gfamilygproblems,gfraud,gandgdisasters.gManygbusinessesgclosegandg
failgduegtogfinancialgtroublegwhichgisgmostlygrelatedgtoglackgofgsalesgandgunsatisfactorygprofits.
4. Whatgaregfivegmegatrendgsourcesgorgcategoriesgforgfindinggentrepreneurialgopportunities?
A+ Pageg3
, CreatedgBy:gAgSolution
Wegidentifygfivegmegatrendgcategories.gTheygare:g(1)gsocietalgchanges,g(2)gdemographicgchanges
,g(3)gtechnologicalgchanges,g(4)gemerginggeconomiesgandgglobalgchanges,gandg(5)gcrisesgandgbub
bles.
Undergsocietalgchangesgwegdiscussgtheggiggeconomygandgthegsharinggeconomy.gTheggiggeconom
ygisgwheregindividualsgacceptgshort-termgjobgassignmentsgorg―gigs‖ginsteadgofghavinggfull-
timegemployment.gThegsharinggeconomygisgwheregindividualsgsharegtheirgassets,gsuchgasghomes,g
vehicles,gandgpersonalgtime,gwithgothersgtogprovidegagnewgwaygforgdistributingggoodsgandgservic
es.
5. Whatgassetgandgfinancialgbubblesghavegoccurredgrecently?
gHowgcangbubblesgandgfinancialgcrisesgleadgtogentrepreneurialgopportunities?
Theg―dot.com‖gorgInternetgbubblegburstging2000.gAngeconomicgrecessiongthatgbeganging2001gwa
sgexacerbatedgbygtheg9/11gterroristgattack.gTheghousinggassetgbubble,gfueledgbygsub-
primegmortgagesgofferedgtogborrowersgwhogcouldgnotgaffordgthem,gburstging2006.gBygthegsecondg
halfgofg2008,gag―perfectgfinancialgstorm‖geruptedgandgpossiblegfinancialgcollapsegbecamegagreali
ty.
Alternativegandgrenewablegenergy,gaccompaniedgbygprojectgcreditgsubsidies,gproductiongandginve
stmentgtaxgcredits,gandgloangguaranteesgbenefitedgasgagresultgofgthegrecentgfinancialgcrisis.gTheseg
developmentsgandgothergeffortsgtogstimulategeconomicgactivitygprovidedgmanygnewgentrepreneuri
algopportunities.
6. Whatgisge-commerce?gWhygaregthegInternetgeconomygandge-commercegheregtogstay?
E-
commerceginvolvesgthegusegofgelectronicgmeansgtogconductgbusinessgonline.gActivitiesgincludegm
arketinggandgsellinggonlinegandgelectronicgretailing.
A+ Pageg4
SOLUTION MANUAL FOR Entrepreneurial Finance, 7th E
g g g g g g
dition by J. Chris Leach, Ronald W. Melicher Chapter 1-
g g g g g g g g g
16 With Cases Products &Spatial Tech A+
g g g g g g
Chapterg1
INTRODUCTIONgTOgFINANCEgFORgENTREPRENEURSgFOCUS
Thegpurposegofgthisgfirstgchaptergisgtogpresentgangoverviewgofgwhatgentrepreneurialgfinancegisgab
out.gIngdoinggsogweghopegtogconveygtogyougthegimportancegofgunderstandinggandgapplyinggentrep
reneurialgfinancegmethodsgandgtoolsgtoghelpgensuregangentrepreneurialgventuregisgsuccessful.gWeg
presentgaglifegcyclegapproachgtogthegteachinggofgentrepreneurialgfinancegwheregwegcovergventureg
operatinggandgfinancialgdecisionsgfacedgbygthegentrepreneurgasgagventuregprogressesgfromgangide
agthroughgtogharvestinggthegventure.
LEARNINGgOBJECTIVES
LOg1.1:gCharacterizegthegentrepreneurialgprocess.
LOg1.2:gDescribegentrepreneurshipgandgsomegcharacteristicsgofgentrepreneurs.
LOg1.3:gIndicategseveralgmegatrendsgprovidinggwavesgofgentrepreneurialgopportunities.gLOg1.4:g
Listgandgdescribegthegsevengprinciplesgofgentrepreneurialgfinance.
LOg1.5:gDiscussgentrepreneurialgfinancegandgthegrolegofgthegfinancialgmanager.gLOg1.6:gDescribe
gthegvariousgstagesgofgagsuccessfulgventure‘sglifegcycle.
LOg1.7:gIdentify,gbyglifegcyclegstage,gthegrelevantgtypesgofgfinancinggandginvestors.gLOg1.8:gUnd
erstandgtheglifegcyclegapproachgusedgingthisgbook.
CHAPTERgOUTLINE
1.1 THEgENTREPRENEURIALgPROCESS
1.2 ENTREPRENEURSHIPgFUNDAMENTALS
A. WhogisgangEntrepreneur?
B. BasicgDefinitions
C. EntrepreneurialgTraitsgorgCharacteristics
D. OpportunitiesgExistgButgNotgWithoutgRisks
1.3 SOURCESgOFgENTREPRENEURIALgOPPORTUNITIES
A+ Pageg1
,CreatedgBy:gAgSolution
A. SocietalgChanges
B. DemographicgChanges
C. TechnologicalgChanges
D. EmerginggEconomiesgandgGlobalgChanges
E. Crisesgandg―Bubbles‖
F. DisruptivegInnovation
1
g
1.4 PRINCIPLESgOFgENTREPRENEURIALgFINANCE
A. Real,gHuman,gandgFinancialgCapitalgmustgbegRentedgfromgOwnersg(Principleg#1)
B. RiskgandgExpectedgRewardggogHandgingHandg(Principleg#2)
C. WhilegAccountinggisgthegLanguagegofgBusiness,gCashgisgthegCurrencyg(Principleg#3)
D. NewgVenturegFinancinggInvolvesgSearch,gNegotiation,gandgPrivacyg(Principleg#4)
E. AgVenture‘sgFinancialgObjectivegisgtogIncreasegValueg(Principleg#5)
F. ItgisgDangerousgtogAssumegthatgPeoplegActgAgainstgTheirgOwngSelf-
Interestsg(Principleg#6)
G. VenturegCharactergandgReputationgcangbegAssetsgorgLiabilitiesg(Principleg#7)
1.5 ROLEgOFgENTREPRENEURIALgFINANCE
1.6 THEgSUCCESSFULgVENTUREgLIFEgCYCLE
A. DevelopmentgStage
B. StartupgStage
C. SurvivalgStage
D. Rapid-GrowthgStage
E. Early-MaturitygStage
F. LifegCyclegStagesgandgthegEntrepreneurialgProcess
1.7 FINANCINGgTHROUGHgTHEgVENTUREgLIFEgCYCLE
A. SeedgFinancing
B. StartupgFinancing
C. First-RoundgFinancing
D. Second-RoundgFinancing
A+ Pageg2
,CreatedgBy:gAgSolution
E. MezzaninegFinancing
F. Liquidity-StagegFinancing
G. SeasonedgFinancing
1.8
LIFEgCYCLEgAPPROACHgFORgTEACHINGgENTREPRENEURIALgFINANCEgSUMMARY
DISCUSSIONgQUESTIONSgANDgANSWERS
1. Whatgisgthegentrepreneurialgprocess?
Thegentrepreneurialgprocessgcomprises:gdevelopinggopportunities,ggatheringgresources,gandgmana
ginggandgbuildinggoperationsgwithgtheggoalgofgcreatinggvalue.
2. Whatgisgentrepreneurship?gWhatgaregsomegbasicgcharacteristicsgofgentrepreneurs?
Entrepreneurshipgisgthegprocessgofgchanginggideasgintogcommercialgopportunitiesgandgcreatinggva
lue.gWhilegtheregisgnogprototypicalgentrepreneur,gmanygareggoodgatgrecognizinggcommercialgopp
ortunities,gtendgtogbegoptimistic,gandgenvisiongagplangforgthegfuture.
3. Whygdogbusinessesgclosegorgceasegoperating?
gWhatgaregthegprimarygreasonsgwhygbusinessesgfail?
g
Nearlygone-
halfgofgbusinessesgthatgfailgdogsogbecausegofgeconomicgfactorsgincludingginadequategsales,ginsuffi
cientgprofits,gandgindustrygweakness.gManygofgthegeconomicgfactorsgaregdirectlygtiedgtogfinancin
ggconcernsg(e.g.,ginsufficientgprofitsgforginvestors).gAlmostg40gpercentgofgbusinessgfailuresgnotgci
tinggeconomicgfactorsgcitegspecificallygfinancialgcausesglikegexcessivegdebtgandginsufficientgfinan
cialgcapital.gThegremaininggcitedgreasonsgforgfailuregincludegaglackgofgbusinessgandgmanagerialge
xperience,gbusinessgconflicts,gfamilygproblems,gfraud,gandgdisasters.gManygbusinessesgclosegandg
failgduegtogfinancialgtroublegwhichgisgmostlygrelatedgtoglackgofgsalesgandgunsatisfactorygprofits.
4. Whatgaregfivegmegatrendgsourcesgorgcategoriesgforgfindinggentrepreneurialgopportunities?
A+ Pageg3
, CreatedgBy:gAgSolution
Wegidentifygfivegmegatrendgcategories.gTheygare:g(1)gsocietalgchanges,g(2)gdemographicgchanges
,g(3)gtechnologicalgchanges,g(4)gemerginggeconomiesgandgglobalgchanges,gandg(5)gcrisesgandgbub
bles.
Undergsocietalgchangesgwegdiscussgtheggiggeconomygandgthegsharinggeconomy.gTheggiggeconom
ygisgwheregindividualsgacceptgshort-termgjobgassignmentsgorg―gigs‖ginsteadgofghavinggfull-
timegemployment.gThegsharinggeconomygisgwheregindividualsgsharegtheirgassets,gsuchgasghomes,g
vehicles,gandgpersonalgtime,gwithgothersgtogprovidegagnewgwaygforgdistributingggoodsgandgservic
es.
5. Whatgassetgandgfinancialgbubblesghavegoccurredgrecently?
gHowgcangbubblesgandgfinancialgcrisesgleadgtogentrepreneurialgopportunities?
Theg―dot.com‖gorgInternetgbubblegburstging2000.gAngeconomicgrecessiongthatgbeganging2001gwa
sgexacerbatedgbygtheg9/11gterroristgattack.gTheghousinggassetgbubble,gfueledgbygsub-
primegmortgagesgofferedgtogborrowersgwhogcouldgnotgaffordgthem,gburstging2006.gBygthegsecondg
halfgofg2008,gag―perfectgfinancialgstorm‖geruptedgandgpossiblegfinancialgcollapsegbecamegagreali
ty.
Alternativegandgrenewablegenergy,gaccompaniedgbygprojectgcreditgsubsidies,gproductiongandginve
stmentgtaxgcredits,gandgloangguaranteesgbenefitedgasgagresultgofgthegrecentgfinancialgcrisis.gTheseg
developmentsgandgothergeffortsgtogstimulategeconomicgactivitygprovidedgmanygnewgentrepreneuri
algopportunities.
6. Whatgisge-commerce?gWhygaregthegInternetgeconomygandge-commercegheregtogstay?
E-
commerceginvolvesgthegusegofgelectronicgmeansgtogconductgbusinessgonline.gActivitiesgincludegm
arketinggandgsellinggonlinegandgelectronicgretailing.
A+ Pageg4
