Solution and Answer Guide: Leach/Melicher, Entrepreneurial Finance 8e, 2027, 9798214057149; Chapter 1: Introduction to Finance for Entrepreneurs
Solution and Answer Guide
LEACH/MELICHER , ENTREPRENEURIAL FINANCE 8E, 2027, 9798214057149;
CHAPTER 1: INTRODUCTION TO FINANCE FOR ENTREPRENEURS
TABLE OF CONTENTS
Purpose and Perspective of the Chapter......................................................................1
Chapter Objectives........................................................................................................1
What’s New in This Chapter........................................................................................2
Discussion Questions and Answers..............................................................................2
Exercises/Problems and Answers................................................................................8
Internet Activities.......................................................................................................................................8
Exercises/Problems and Answers..............................................................................................................9
Supplemental Exercises/Problems and Answers.....................................................................................13
Mini Case: INTERACT SYSTEMS, INC. Answers.....................................................16
PURPOSE AND PERSPECTIVE OF THE CHAPTER
The purpose of this first chapter is to present an overview of what entrepreneurial finance is about. In
doing so, we hope to convey to you the importance of understanding and applying entrepreneurial finance
methods and tools to help ensure an entrepreneurial venture is successful. We present a life-cycle
approach to the teaching of entrepreneurial finance, where we cover venture operating and financial
decisions faced by the entrepreneur as a venture progresses from an idea through to harvesting.
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
LO 1.1 Characterize the entrepreneurial process.
LO 1.2 Describe entrepreneurship and some characteristics of entrepreneurs.
LO 1.3 Indicate several megatrends providing waves of entrepreneurial opportunities.
LO 1.4 Describe the seven principles of entrepreneurial finance.
LO 1.5 Discuss entrepreneurial finance and the role of the financial manager.
LO 1.6 Describe the various stages of a successful venture’s life cycle.
LO 1.7 Identify, by life cycle stage, the relevant types of financing and investors.
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 1
accessible website, in whole or in part.
,Solution and Answer Guide: Leach/Melicher, Entrepreneurial Finance 8e, 2027, 9798214057149; Chapter 1: Introduction to Finance for Entrepreneurs
LO 1.8 Explain the life cycle approach used in this book.
WHAT’S NEW IN THIS CHAPTER
The following elements in this chapter are improvements over the previous edition: The overall structure,
learning objectives, and core conceptual framework remain unchanged, preserving the chapter’s role as an
introduction to entrepreneurial finance and the venture life cycle. However, the chapter has been updated
to reflect the evolving entrepreneurial landscape. In particular, the discussion of megatrends has been
expanded to include the growing importance of artificial intelligence (AI) as a driver of innovation and
new venture creation, as well as the emergence of the work-from-home economy and related shifts in
labor markets, which were accelerated by the COVID-19 pandemic. These additions provide a more
current perspective on how technological and societal changes create entrepreneurial opportunities.
Examples and terminology throughout the chapter have also been refreshed to better align with
contemporary business practices, while maintaining continuity with the established principles of
entrepreneurial finance.
DISCUSSION QUESTIONS AND ANSWERS
1. What is the entrepreneurial process?
Answer:
The entrepreneurial process comprises developing opportunities, gathering resources, and
managing and building operations with the goal of creating value.
2. What is entrepreneurship? What are some basic characteristics of entrepreneurs?
Answer:
Entrepreneurship is the process of changing ideas into commercial opportunities and creating
value. While there is no prototypical entrepreneur, many are good at recognizing commercial
opportunities, tend to be optimistic, and envision a plan for the future.
3. Why do businesses close or cease operating? What are the primary reasons why businesses fail?
Answer:
Nearly one-half of businesses that fail do so because of economic factors, including inadequate
sales, insufficient profits, and industry weakness. Many of the economic factors are directly tied
to financing concerns (e.g., insufficient profits for investors). Almost 40 percent of business
failures, not citing economic factors, cite specifically financial causes, such as excessive debt and
insufficient financial capital. The remaining cited reasons for failure include a lack of business
and managerial experience, business conflicts, family problems, fraud, and disasters. Many
businesses close and fail due to financial trouble, which is mostly related to a lack of sales and
unsatisfactory profits.
4. What are five megatrend sources or categories for finding entrepreneurial opportunities?
Answer:
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 2
accessible website, in whole or in part.
,Solution and Answer Guide: Leach/Melicher, Entrepreneurial Finance 8e, 2027, 9798214057149; Chapter 1: Introduction to Finance for Entrepreneurs
We identify five megatrend categories. They are: (1) societal changes, (2) demographic changes,
(3) technological changes, (4) emerging economies and global changes, and (5) crises and
bubbles.
Under societal changes, we discuss the gig economy and the sharing economy. The gig
economy is a system in which individuals accept short-term job assignments or “gigs” rather
than having full-time employment. The sharing economy is a system in which individuals
share their assets, such as homes, vehicles, and personal time, with others to provide a new way
for distributing goods and services.
5. What asset and financial bubbles have occurred recently? How can bubbles and financial crises
lead to entrepreneurial opportunities?
Answer:
The “dot.com” or Internet bubble burst in 2000. An economic recession that began in 2001 was
exacerbated by the 9/11 terrorist attack. The housing asset bubble, fueled by sub-prime mortgages
offered to borrowers who could not afford them, burst in 2006. By the second half of 2008, a
“perfect financial storm” erupted and possible financial collapse became a reality.
Alternative and renewable energy, accompanied by project credit subsidies, production and
investment tax credits, and loan guarantees, benefited as a result of the recent financial crisis.
These developments and other efforts to stimulate economic activity provided many new
entrepreneurial opportunities.
6. What is e-commerce? Why is the Internet economy and e-commerce here to stay?
Answer:
E-commerce involves the use of electronic means to conduct business online. Activities
include marketing and selling online and electronic retailing.
The internet economy and e-commerce are here to stay. We will never do business the same way
we did before the Internet and the Web. Many business plans were funded on the belief that some
of the benefits could be captured by sellers (producers and retailers). However, we now know that
the Web so effectively facilitates price competition that it is hard for suppliers and retailers to
protect margins. E-commerce may not deliver the margins once conjectured, but the Internet is
still one of the most radical innovations in our lifetime.
7. What is meant by disruptive innovation? What is the “sharing economy” societal trend?
Answer:
An innovation involves the introduction of a new idea, product, or process. A disruptive
innovation is an innovation that creates a new market or network that disrupts and displaces an
existing market or network.
8. Identify the seven principles of entrepreneurial finance.
Answer:
The seven principles are:
(1) Real, human, and financial capital must be rented from owners
(2) Risk and expected reward go hand in hand
(3) While accounting is the language of business, cash is the currency
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 3
accessible website, in whole or in part.
, Solution and Answer Guide: Leach/Melicher, Entrepreneurial Finance 8e, 2027, 9798214057149; Chapter 1: Introduction to Finance for Entrepreneurs
(4) New venture financing involves search, negotiation, and privacy
(5) A venture’s financial objective is to increase value
(6) It is dangerous to assume that people act against their own self-interests
(7) Venture character and reputation can be assets or liabilities
9. Explain the statement: “The time value of money is not the only cost involved in renting
someone’s financial capital.”
Answer:
The total cost of renting someone’s financial capital is typically significantly higher than the time
value of money alone due to the risk that the venture won’t be able to pay. The rent is risky or
uncertain, requiring expected compensation in addition to the time value of money for the renting
agreement to be put in place.
10. How do public and private financial markets differ?
Answer:
Public financial markets are markets where standardized contracts or securities are traded
on organized securities exchanges. Private financial markets are markets where
customized contracts or securities are negotiated, created, and held with restrictions on how they
can be transferred.
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 4
accessible website, in whole or in part.
Solution and Answer Guide
LEACH/MELICHER , ENTREPRENEURIAL FINANCE 8E, 2027, 9798214057149;
CHAPTER 1: INTRODUCTION TO FINANCE FOR ENTREPRENEURS
TABLE OF CONTENTS
Purpose and Perspective of the Chapter......................................................................1
Chapter Objectives........................................................................................................1
What’s New in This Chapter........................................................................................2
Discussion Questions and Answers..............................................................................2
Exercises/Problems and Answers................................................................................8
Internet Activities.......................................................................................................................................8
Exercises/Problems and Answers..............................................................................................................9
Supplemental Exercises/Problems and Answers.....................................................................................13
Mini Case: INTERACT SYSTEMS, INC. Answers.....................................................16
PURPOSE AND PERSPECTIVE OF THE CHAPTER
The purpose of this first chapter is to present an overview of what entrepreneurial finance is about. In
doing so, we hope to convey to you the importance of understanding and applying entrepreneurial finance
methods and tools to help ensure an entrepreneurial venture is successful. We present a life-cycle
approach to the teaching of entrepreneurial finance, where we cover venture operating and financial
decisions faced by the entrepreneur as a venture progresses from an idea through to harvesting.
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
LO 1.1 Characterize the entrepreneurial process.
LO 1.2 Describe entrepreneurship and some characteristics of entrepreneurs.
LO 1.3 Indicate several megatrends providing waves of entrepreneurial opportunities.
LO 1.4 Describe the seven principles of entrepreneurial finance.
LO 1.5 Discuss entrepreneurial finance and the role of the financial manager.
LO 1.6 Describe the various stages of a successful venture’s life cycle.
LO 1.7 Identify, by life cycle stage, the relevant types of financing and investors.
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 1
accessible website, in whole or in part.
,Solution and Answer Guide: Leach/Melicher, Entrepreneurial Finance 8e, 2027, 9798214057149; Chapter 1: Introduction to Finance for Entrepreneurs
LO 1.8 Explain the life cycle approach used in this book.
WHAT’S NEW IN THIS CHAPTER
The following elements in this chapter are improvements over the previous edition: The overall structure,
learning objectives, and core conceptual framework remain unchanged, preserving the chapter’s role as an
introduction to entrepreneurial finance and the venture life cycle. However, the chapter has been updated
to reflect the evolving entrepreneurial landscape. In particular, the discussion of megatrends has been
expanded to include the growing importance of artificial intelligence (AI) as a driver of innovation and
new venture creation, as well as the emergence of the work-from-home economy and related shifts in
labor markets, which were accelerated by the COVID-19 pandemic. These additions provide a more
current perspective on how technological and societal changes create entrepreneurial opportunities.
Examples and terminology throughout the chapter have also been refreshed to better align with
contemporary business practices, while maintaining continuity with the established principles of
entrepreneurial finance.
DISCUSSION QUESTIONS AND ANSWERS
1. What is the entrepreneurial process?
Answer:
The entrepreneurial process comprises developing opportunities, gathering resources, and
managing and building operations with the goal of creating value.
2. What is entrepreneurship? What are some basic characteristics of entrepreneurs?
Answer:
Entrepreneurship is the process of changing ideas into commercial opportunities and creating
value. While there is no prototypical entrepreneur, many are good at recognizing commercial
opportunities, tend to be optimistic, and envision a plan for the future.
3. Why do businesses close or cease operating? What are the primary reasons why businesses fail?
Answer:
Nearly one-half of businesses that fail do so because of economic factors, including inadequate
sales, insufficient profits, and industry weakness. Many of the economic factors are directly tied
to financing concerns (e.g., insufficient profits for investors). Almost 40 percent of business
failures, not citing economic factors, cite specifically financial causes, such as excessive debt and
insufficient financial capital. The remaining cited reasons for failure include a lack of business
and managerial experience, business conflicts, family problems, fraud, and disasters. Many
businesses close and fail due to financial trouble, which is mostly related to a lack of sales and
unsatisfactory profits.
4. What are five megatrend sources or categories for finding entrepreneurial opportunities?
Answer:
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 2
accessible website, in whole or in part.
,Solution and Answer Guide: Leach/Melicher, Entrepreneurial Finance 8e, 2027, 9798214057149; Chapter 1: Introduction to Finance for Entrepreneurs
We identify five megatrend categories. They are: (1) societal changes, (2) demographic changes,
(3) technological changes, (4) emerging economies and global changes, and (5) crises and
bubbles.
Under societal changes, we discuss the gig economy and the sharing economy. The gig
economy is a system in which individuals accept short-term job assignments or “gigs” rather
than having full-time employment. The sharing economy is a system in which individuals
share their assets, such as homes, vehicles, and personal time, with others to provide a new way
for distributing goods and services.
5. What asset and financial bubbles have occurred recently? How can bubbles and financial crises
lead to entrepreneurial opportunities?
Answer:
The “dot.com” or Internet bubble burst in 2000. An economic recession that began in 2001 was
exacerbated by the 9/11 terrorist attack. The housing asset bubble, fueled by sub-prime mortgages
offered to borrowers who could not afford them, burst in 2006. By the second half of 2008, a
“perfect financial storm” erupted and possible financial collapse became a reality.
Alternative and renewable energy, accompanied by project credit subsidies, production and
investment tax credits, and loan guarantees, benefited as a result of the recent financial crisis.
These developments and other efforts to stimulate economic activity provided many new
entrepreneurial opportunities.
6. What is e-commerce? Why is the Internet economy and e-commerce here to stay?
Answer:
E-commerce involves the use of electronic means to conduct business online. Activities
include marketing and selling online and electronic retailing.
The internet economy and e-commerce are here to stay. We will never do business the same way
we did before the Internet and the Web. Many business plans were funded on the belief that some
of the benefits could be captured by sellers (producers and retailers). However, we now know that
the Web so effectively facilitates price competition that it is hard for suppliers and retailers to
protect margins. E-commerce may not deliver the margins once conjectured, but the Internet is
still one of the most radical innovations in our lifetime.
7. What is meant by disruptive innovation? What is the “sharing economy” societal trend?
Answer:
An innovation involves the introduction of a new idea, product, or process. A disruptive
innovation is an innovation that creates a new market or network that disrupts and displaces an
existing market or network.
8. Identify the seven principles of entrepreneurial finance.
Answer:
The seven principles are:
(1) Real, human, and financial capital must be rented from owners
(2) Risk and expected reward go hand in hand
(3) While accounting is the language of business, cash is the currency
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 3
accessible website, in whole or in part.
, Solution and Answer Guide: Leach/Melicher, Entrepreneurial Finance 8e, 2027, 9798214057149; Chapter 1: Introduction to Finance for Entrepreneurs
(4) New venture financing involves search, negotiation, and privacy
(5) A venture’s financial objective is to increase value
(6) It is dangerous to assume that people act against their own self-interests
(7) Venture character and reputation can be assets or liabilities
9. Explain the statement: “The time value of money is not the only cost involved in renting
someone’s financial capital.”
Answer:
The total cost of renting someone’s financial capital is typically significantly higher than the time
value of money alone due to the risk that the venture won’t be able to pay. The rent is risky or
uncertain, requiring expected compensation in addition to the time value of money for the renting
agreement to be put in place.
10. How do public and private financial markets differ?
Answer:
Public financial markets are markets where standardized contracts or securities are traded
on organized securities exchanges. Private financial markets are markets where
customized contracts or securities are negotiated, created, and held with restrictions on how they
can be transferred.
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly 4
accessible website, in whole or in part.
