SOLUTION MANUAL FOR
Entrepreneurial Finance, 7th Edition J. Chris Leach (Author),
Ronald W. Melicher (Author)
Chapter 1-16 With Cases Products &Spatial Tech Chapter 1
| | | | | | | |
INTRODUCTION |TO |FINANCE |FOR |ENTREPRENEURS |FOCUS
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 |the |venture.
LEARNING |OBJECTIVES
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: |List |and |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. |LO
|1.8: |Understand |the |life |cycle |approach |used |in |this |book.
CHAPTER |OUTLINE
1.1 THE |ENTREPRENEURIAL |PROCESS
1.2 ENTREPRENEURSHIP |FUNDAMENTALS
A. Who |is |an |Entrepreneur?
B. Basic |Definitions
C. Entrepreneurial |Traits |or |Characteristics
D. Opportunities |Exist |But |Not |Without |Risks
1.3 SOURCES |OF |ENTREPRENEURIAL |OPPORTUNITIES
A. Societal |Changes
B. Demographic |Changes
C. Technological |Changes
D. Emerging |Economies |and |Global |Changes
E. Crises |and |―Bubbles‖
F. Disruptive |Innovation
1
,2 Chapter |6: |Managing |Cash |Flow
1.4 PRINCIPLES |OF |ENTREPRENEURIAL |FINANCE
A. Real, |Human, |and |Financial |Capital |must |be |Rented |from |Owners |(Principle |#1)
B. Risk |and |Expected |Reward |go |Hand |in |Hand |(Principle |#2)
C. While |Accounting |is |the |Language |of |Business, |Cash |is |the |Currency |(Principle |#3)
D. New |Venture |Financing |Involves |Search, |Negotiation, |and |Privacy |(Principle |#4)
E. A |Venture‘s |Financial |Objective |is |to |Increase |Value |(Principle |#5)
F. It |is |Dangerous |to |Assume |that |People |Act |Against |Their |Own |Self-Interests
|(Principle |#6)
G. Venture |Character |and |Reputation |can |be |Assets |or |Liabilities |(Principle |#7)
1.5 ROLE |OF |ENTREPRENEURIAL |FINANCE
1.6 THE |SUCCESSFUL |VENTURE |LIFE |CYCLE
A. Development |Stage
B. Startup |Stage
C. Survival |Stage
D. Rapid-Growth |Stage
E. Early-Maturity |Stage
F. Life |Cycle |Stages |and |the |Entrepreneurial |Process
1.7 FINANCING |THROUGH |THE |VENTURE |LIFE |CYCLE
A. Seed |Financing
B. Startup |Financing
C. First-Round |Financing
D. Second-Round |Financing
E. Mezzanine |Financing
F. Liquidity-Stage |Financing
G. Seasoned |Financing
1.8 LIFE |CYCLE |APPROACH |FOR |TEACHING |ENTREPRENEURIAL |FINANCE
|SUMMARY
DISCUSSION |QUESTIONS |AND |ANSWERS
1. What |is |the |entrepreneurial |process?
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?
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?
, Chapter |6: |Managing |Cash |Flow 3
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 |like |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 |lack |of |sales
|and |unsatisfactory |profits.
4. What |are |five |megatrend |sources |or |categories |for |finding |entrepreneurial |opportunities?
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 |where |individuals |accept |short-term |job |assignments |or |―gigs‖ |instead |of |having
|full-time |employment. | The |sharing |economy |is |where |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?
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 |are |the |Internet |economy |and |e-commerce |here |to |stay?
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 |with |the |belief
|that |part |of |the |benefit |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.
, 4 Chapter |6: |Managing |Cash |Flow
7. What |is |meant |by |disruptive |innovation? | What |is |the |―sharing |economy‖ |societal |trend?
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.
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
(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.‖
The |total |cost |of |renting |someone‘s |financial |capital |is |typically |significantly |higher |than |just
|the |time |value |of |money |due |to |the |possibility |that |the |venture |won‘t |be |able |to |pay. | The |rent |is
|risky |or |uncertain |requiring |an |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?
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.
11. What |is |the |financial |goal |of |the |entrepreneurial |venture? | What |are |the |major |components
|for |estimating |value?
The |venture‘s |financial |goal |is |to |maximize |the |value |of |the |venture |to |its |owner(s). | The |major
|components |of |estimating |value |are |projected |free |cash |flow |(cash |generated |in |a |specified |time
|period |that |exceeds |funds |needed |to |operate, |pay |creditors, |and |invest |in |the |assets |needed |to
|grow |the |venture) |and |its |risk |(including |the |timing |and |realized |amount).
12. From |an |agency |relationship |standpoint, |describe |the |possible |types |of |problems |or |conflicts
|of |interest |that |could |inhibit |maximizing |a |venture’s |value.
There |are |two |basic |types |of |conflicts. | Owner-manager |(agency) |conflicts |occur |when |there
|are |differences |between |managers‘ |self-interests |and |the |interests |of |the |owners |who |hired |the
Entrepreneurial Finance, 7th Edition J. Chris Leach (Author),
Ronald W. Melicher (Author)
Chapter 1-16 With Cases Products &Spatial Tech Chapter 1
| | | | | | | |
INTRODUCTION |TO |FINANCE |FOR |ENTREPRENEURS |FOCUS
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 |the |venture.
LEARNING |OBJECTIVES
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: |List |and |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. |LO
|1.8: |Understand |the |life |cycle |approach |used |in |this |book.
CHAPTER |OUTLINE
1.1 THE |ENTREPRENEURIAL |PROCESS
1.2 ENTREPRENEURSHIP |FUNDAMENTALS
A. Who |is |an |Entrepreneur?
B. Basic |Definitions
C. Entrepreneurial |Traits |or |Characteristics
D. Opportunities |Exist |But |Not |Without |Risks
1.3 SOURCES |OF |ENTREPRENEURIAL |OPPORTUNITIES
A. Societal |Changes
B. Demographic |Changes
C. Technological |Changes
D. Emerging |Economies |and |Global |Changes
E. Crises |and |―Bubbles‖
F. Disruptive |Innovation
1
,2 Chapter |6: |Managing |Cash |Flow
1.4 PRINCIPLES |OF |ENTREPRENEURIAL |FINANCE
A. Real, |Human, |and |Financial |Capital |must |be |Rented |from |Owners |(Principle |#1)
B. Risk |and |Expected |Reward |go |Hand |in |Hand |(Principle |#2)
C. While |Accounting |is |the |Language |of |Business, |Cash |is |the |Currency |(Principle |#3)
D. New |Venture |Financing |Involves |Search, |Negotiation, |and |Privacy |(Principle |#4)
E. A |Venture‘s |Financial |Objective |is |to |Increase |Value |(Principle |#5)
F. It |is |Dangerous |to |Assume |that |People |Act |Against |Their |Own |Self-Interests
|(Principle |#6)
G. Venture |Character |and |Reputation |can |be |Assets |or |Liabilities |(Principle |#7)
1.5 ROLE |OF |ENTREPRENEURIAL |FINANCE
1.6 THE |SUCCESSFUL |VENTURE |LIFE |CYCLE
A. Development |Stage
B. Startup |Stage
C. Survival |Stage
D. Rapid-Growth |Stage
E. Early-Maturity |Stage
F. Life |Cycle |Stages |and |the |Entrepreneurial |Process
1.7 FINANCING |THROUGH |THE |VENTURE |LIFE |CYCLE
A. Seed |Financing
B. Startup |Financing
C. First-Round |Financing
D. Second-Round |Financing
E. Mezzanine |Financing
F. Liquidity-Stage |Financing
G. Seasoned |Financing
1.8 LIFE |CYCLE |APPROACH |FOR |TEACHING |ENTREPRENEURIAL |FINANCE
|SUMMARY
DISCUSSION |QUESTIONS |AND |ANSWERS
1. What |is |the |entrepreneurial |process?
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?
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?
, Chapter |6: |Managing |Cash |Flow 3
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 |like |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 |lack |of |sales
|and |unsatisfactory |profits.
4. What |are |five |megatrend |sources |or |categories |for |finding |entrepreneurial |opportunities?
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 |where |individuals |accept |short-term |job |assignments |or |―gigs‖ |instead |of |having
|full-time |employment. | The |sharing |economy |is |where |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?
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 |are |the |Internet |economy |and |e-commerce |here |to |stay?
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 |with |the |belief
|that |part |of |the |benefit |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.
, 4 Chapter |6: |Managing |Cash |Flow
7. What |is |meant |by |disruptive |innovation? | What |is |the |―sharing |economy‖ |societal |trend?
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.
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
(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.‖
The |total |cost |of |renting |someone‘s |financial |capital |is |typically |significantly |higher |than |just
|the |time |value |of |money |due |to |the |possibility |that |the |venture |won‘t |be |able |to |pay. | The |rent |is
|risky |or |uncertain |requiring |an |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?
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.
11. What |is |the |financial |goal |of |the |entrepreneurial |venture? | What |are |the |major |components
|for |estimating |value?
The |venture‘s |financial |goal |is |to |maximize |the |value |of |the |venture |to |its |owner(s). | The |major
|components |of |estimating |value |are |projected |free |cash |flow |(cash |generated |in |a |specified |time
|period |that |exceeds |funds |needed |to |operate, |pay |creditors, |and |invest |in |the |assets |needed |to
|grow |the |venture) |and |its |risk |(including |the |timing |and |realized |amount).
12. From |an |agency |relationship |standpoint, |describe |the |possible |types |of |problems |or |conflicts
|of |interest |that |could |inhibit |maximizing |a |venture’s |value.
There |are |two |basic |types |of |conflicts. | Owner-manager |(agency) |conflicts |occur |when |there
|are |differences |between |managers‘ |self-interests |and |the |interests |of |the |owners |who |hired |the
