SOLUTION MANUAL FOR t t
Entrepreneurial Finance, 7th Edition J. Chris Leach (Author), t t t t t t t
Ronald W. Melicher (Author)
t t t t
Chapter 1-16 With Cases Products &Spatial Tech
t t t t t t
Chapter 1
t t
INTRODUCTION TO FINANCE FOR ENTREPRENEURS FOCUS t t t t t
The purpose of this first chapter is to present an overview of what entrepreneurial finance is about.
t t t t t t t t t t t t t t t t
tIn doing so we hope to convey to you the importance of understanding and applying
t t t t t t t t t t t t t t
entrepreneurial finance methods and tools to help ensure an entrepreneurial venture is successful.
t t t t t t t t t t t t t
We present a life cycle approach to the teaching of entrepreneurial finance where we cover venture
t t t t t t t t t t t t t t t t
operating and financial decisions faced by the entrepreneur as a venture progresses from an idea
t t t t t t t t t t t t t t t
through to harvesting the venture.
t t t t t
LEARNING OBJECTIVES t
LO 1.1: Characterize the entrepreneurial process.
t t t t t
LO 1.2: Describe entrepreneurship and some characteristics of entrepreneurs.
t t t t t t t t
LO 1.3: Indicate several megatrends providing waves of entrepreneurial opportunities.
t t t t t t t t t
LO 1.4: List and describe the seven principles of entrepreneurial finance.
t t t t t t t t t t t
LO 1.5: Discuss entrepreneurial finance and the role of the financial manager. LO
t t t t t t t t t t t t
1.6: Describe the various stages of a successful venture‘s life cycle.
t t t t t t t t t t t
LO 1.7: Identify, by life cycle stage, the relevant types of financing and investors. LO
t t t t t t t t t t t t t t
1.8: Understand the life cycle approach used in this book.
t t t t t t t t t t
CHAPTER OUTLINE t
1.1 THE ENTREPRENEURIAL PROCESS t t
1.2 ENTREPRENEURSHIP FUNDAMENTALS t
A. Who is an Entrepreneur? t t t
B. Basic Definitions t
C. Entrepreneurial Traits or Characteristics t t t
D. Opportunities Exist But Not Without Risks t t t t t
1.3 SOURCES OF ENTREPRENEURIAL OPPORTUNITIES t t t
A. Societal Changes t
B. Demographic Changes t
C. Technological Changes t
D. Emerging Economies and Global Changes t t t t
E. Crises and ―Bubbles‖ t t
F. Disruptive Innovation t
1
,2 Chapter 6: Managing Cash Flow t t t t
1.4 PRINCIPLES OF ENTREPRENEURIAL FINANCE t t t
A. Real, Human, and Financial Capital must be Rented from Owners (Principle #1)
t t t t t t t t t t t
B. Risk and Expected Reward go Hand in Hand (Principle #2)
t t t t t t t t t
C. While Accounting is the Language of Business, Cash is the Currency (Principle #3)
t t t t t t t t t t t t
D. New Venture Financing Involves Search, Negotiation, and Privacy (Principle #4)
t t t t t t t t t
E. A Venture‘s Financial Objective is to Increase Value (Principle #5)
t t t t t t t t t
F. It is Dangerous to Assume that People Act Against Their Own Self-Interests
t t t t t t t t t t t
(Principle #6) t t
G. Venture Character and Reputation can be Assets or Liabilities (Principle #7)
t t t t t t t t t t
1.5 ROLE OF ENTREPRENEURIAL FINANCE
t t t
1.6 THE SUCCESSFUL VENTURE LIFE CYCLE
t t t t
A. Development Stage t
B. Startup Stage t
C. Survival Stage t
D. Rapid-Growth Stage t
E. Early-Maturity Stage t
F. Life Cycle Stages and the Entrepreneurial Process
t t t t t t
1.7 FINANCING THROUGH THE VENTURE LIFE CYCLE t t t t t
A. Seed Financing t
B. Startup Financing t
C. First-Round Financing t
D. Second-Round Financing t
E. Mezzanine Financing t
F. Liquidity-Stage Financing t
G. Seasoned Financing t
1.8 LIFE CYCLE APPROACH FOR TEACHING ENTREPRENEURIAL FINANCE
t t t t t t
SUMMARY
t
DISCUSSION QUESTIONS AND ANSWERS t t t
1. What is the entrepreneurial process?
t t t t
The entrepreneurial process comprises: developing opportunities, gathering resources, and
t t t t t t t t
managing and building operations with the goal of creating value.
t t t t t t t t t t
2. What is entrepreneurship? What are some basic characteristics of entrepreneurs?
t t t t t t t t t
Entrepreneurship is the process of changing ideas into commercial opportunities and creating
t t t t t t t t t t t
value. While there is no prototypical entrepreneur, many are good at recognizing commercial
t t t t t t t t t t t t t
opportunities, tend to be optimistic, and envision a plan for the future.
t t t t t t t t t t t t
3. Why do businesses close or cease operating? What are the primary reasons why businesses
t t t t t t t t t t t t t
fail?
t
, Chapter 6: Managing Cash Flow t t t t 3
Nearly one-half of businesses that fail do so because of economic factors including inadequate
t t t t t t t t t t t t t
sales, insufficient profits, and industry weakness. Many of the economic factors are directly
t t t t t t t t t t t t t
tied to financing concerns (e.g., insufficient profits for investors). Almost 40 percent of
t t t t t t t t t t t t t
business failures not citing economic factors cite specifically financial causes like excessive
t t t t t t t t t t t t
debt and insufficient financial capital. The remaining cited reasons for failure include a lack of
t t t t t t t t t t t t t t t
business and managerial experience, business conflicts, family problems, fraud, and disasters.
t t t t t t t t t t t
tMany businesses close and fail due to financial trouble which is mostly related to lack of sales
t t t t t t t t t t t t t t t t
and unsatisfactory profits.
t t t
4. What are five megatrend sources or categories for finding entrepreneurial opportunities?
t t t t t t t t t t
We identify five megatrend categories. They are: (1) societal changes, (2) demographic
t t t t t t t t t t t
changes, (3) technological changes, (4) emerging economies and global changes, and (5)
t t t t t t t t t t t t
crises and bubbles.
t t t
Under societal changes we discuss the gig economy and the sharing economy. The gig
t t t t t t t t t t t t t
economy is where individuals accept short-term job assignments or ―gigs‖ instead of having
t t t t t t t t t t t t t
full-time employment. The sharing economy is where individuals share their assets, such as
t t t t t t t t t t t t t
homes, vehicles, and personal time, with others to provide a new way for distributing goods
t t t t t t t t t t t t t t t
and services.
t t
5. What asset and financial bubbles have occurred recently? How can bubbles and financial
t t t t t t t t t t t t
crises lead to entrepreneurial opportunities?
t t t t t
The ―dot.com‖ or Internet bubble burst in 2000. An economic recession that began in 2001
t t t t t t t t t t t t t t
was exacerbated by the 9/11 terrorist attack. The housing asset bubble, fueled by sub-prime
t t t t t t t t t t t t t t
mortgages offered to borrowers who could not afford them, burst in 2006. By the second half
t t t t t t t t t t t t t t t t
of 2008, a ―perfect financial storm‖ erupted and possible financial collapse became a reality.
t t t t t t t t t t t t t t
Alternative and renewable energy, accompanied by project credit subsidies, production and
t t t t t t t t t t
investment tax credits, and loan guarantees benefited as a result of the recent financial crisis. These
t t t t t t t t t t t t t t t t
developments and other efforts to stimulate economic activity provided many new entrepreneurial
t t t t t t t t t t t t
opportunities.
t
6. What is e-commerce? Why are the Internet economy and e-commerce here to stay?
t t t t t t t t t t t t
E-commerce involves the use of electronic means to conduct business online. Activities t t t t t t t t t t t
include marketing and selling online and electronic retailing.
t t t t t t t t
The internet economy and e-commerce are here to stay. We will never do business the same
t t t t t t t t t t t t t t t
way we did before the Internet and the Web. Many business plans were funded with the belief
t t t t t t t t t t t t t t t t t
that part of the benefit could be captured by sellers (producers and retailers).
t t t t t t t t t t t t t
However, we now know that the Web so effectively facilitates price competition that it is hard
t t t t t t t t t t t t t t t
for suppliers and retailers to protect margins. E-commerce may not deliver the margins once
t t t t t t t t t t t t t t
conjectured, but the Internet is still one of the most radical innovations in our lifetime.
t t t t t t t t t t t t t t t
, 4 Chapter 6: Managing Cash Flow t t t t
7. What is meant by disruptive innovation? What is the ―sharing economy‖ societal trend?
t t t t t t t t t t t t
An innovation involves the introduction of a new idea, product, or process. A disruptive
t t t t t t t t t t t t t
innovation is an innovation that creates a new market or network that disrupts and displaces an
t t t t t t t t t t t t t t t t
existing market or network.
t t t t
8. Identify the seven principles of entrepreneurial finance.
t t t t t t
The seven principles are:
t t t
(1) Real, human, and financial capital must be rented from owners t t t t t t t t t
(2) Risk and expected reward go hand in hand t t t t t t t
(3) While accounting is the language of business, cash is the currency t t t t t t t t t t
(4) New venture financing involves search, negotiation, and privacy t t t t t t t
(5) A venture‘s financial objective is to increase value
t t t t t t t
(6) It is dangerous to assume that people act against their own self-interests
t t t t t t t t t t t
(7) Venture character and reputation can be assets or liabilities t t t t t t t t
9. Explain the statement: ―The time value of money is not the only cost involved in renting
t t t t t t t t t t t t t t t
someone’s financial capital.‖
t t t
The total cost of renting someone‘s financial capital is typically significantly higher than just
t t t t t t t t t t t t t
the time value of money due to the possibility that the venture won‘t be able to pay. The rent is
t t t t t t t t t t t t t t t t t t t t
risky or uncertain requiring an expected compensation in addition to the time value of money
t t t t t t t t t t t t t t t
for the renting agreement to be put in place.
t t t t t t t t t
10. How do public and private financial markets differ?
t t t t t t t
Public financial markets are markets where standardized contracts or securities are traded on
t t t t t t t t t t t t
organized securities exchanges. Private financial markets are markets where customized
t t t t t t t t t t
contracts or securities are negotiated, created, and held with restrictions on how they can be
t t t t t t t t t t t t t t t
transferred.
t
11. What is the financial goal of the entrepreneurial venture? What are the major components
t t t t t t t t t t t t t
for estimating value?
t t t
The venture‘s financial goal is to maximize the value of the venture to its owner(s). The major
t t t t t t t t t t t t t t t t
components of estimating value are projected free cash flow (cash generated in a specified time
t t t t t t t t t t t t t t t
period that exceeds funds needed to operate, pay creditors, and invest in the assets needed to
t t t t t t t t t t t t t t t t
grow the venture) and its risk (including the timing and realized amount).
t t t t t t t t t t t t
12. From an agency relationship standpoint, describe the possible types of problems or conflicts of
t t t t t t t t t t t t t
interest that could inhibit maximizing a venture’s value.
t t t t t t t t
There are two basic types of conflicts. Owner-manager (agency) conflicts occur when there
t t t t t t t t t t t t
are differences between managers‘ self-interests and the interests of the owners who hired the
t t t t t t t t t t t t t t
Entrepreneurial Finance, 7th Edition J. Chris Leach (Author), t t t t t t t
Ronald W. Melicher (Author)
t t t t
Chapter 1-16 With Cases Products &Spatial Tech
t t t t t t
Chapter 1
t t
INTRODUCTION TO FINANCE FOR ENTREPRENEURS FOCUS t t t t t
The purpose of this first chapter is to present an overview of what entrepreneurial finance is about.
t t t t t t t t t t t t t t t t
tIn doing so we hope to convey to you the importance of understanding and applying
t t t t t t t t t t t t t t
entrepreneurial finance methods and tools to help ensure an entrepreneurial venture is successful.
t t t t t t t t t t t t t
We present a life cycle approach to the teaching of entrepreneurial finance where we cover venture
t t t t t t t t t t t t t t t t
operating and financial decisions faced by the entrepreneur as a venture progresses from an idea
t t t t t t t t t t t t t t t
through to harvesting the venture.
t t t t t
LEARNING OBJECTIVES t
LO 1.1: Characterize the entrepreneurial process.
t t t t t
LO 1.2: Describe entrepreneurship and some characteristics of entrepreneurs.
t t t t t t t t
LO 1.3: Indicate several megatrends providing waves of entrepreneurial opportunities.
t t t t t t t t t
LO 1.4: List and describe the seven principles of entrepreneurial finance.
t t t t t t t t t t t
LO 1.5: Discuss entrepreneurial finance and the role of the financial manager. LO
t t t t t t t t t t t t
1.6: Describe the various stages of a successful venture‘s life cycle.
t t t t t t t t t t t
LO 1.7: Identify, by life cycle stage, the relevant types of financing and investors. LO
t t t t t t t t t t t t t t
1.8: Understand the life cycle approach used in this book.
t t t t t t t t t t
CHAPTER OUTLINE t
1.1 THE ENTREPRENEURIAL PROCESS t t
1.2 ENTREPRENEURSHIP FUNDAMENTALS t
A. Who is an Entrepreneur? t t t
B. Basic Definitions t
C. Entrepreneurial Traits or Characteristics t t t
D. Opportunities Exist But Not Without Risks t t t t t
1.3 SOURCES OF ENTREPRENEURIAL OPPORTUNITIES t t t
A. Societal Changes t
B. Demographic Changes t
C. Technological Changes t
D. Emerging Economies and Global Changes t t t t
E. Crises and ―Bubbles‖ t t
F. Disruptive Innovation t
1
,2 Chapter 6: Managing Cash Flow t t t t
1.4 PRINCIPLES OF ENTREPRENEURIAL FINANCE t t t
A. Real, Human, and Financial Capital must be Rented from Owners (Principle #1)
t t t t t t t t t t t
B. Risk and Expected Reward go Hand in Hand (Principle #2)
t t t t t t t t t
C. While Accounting is the Language of Business, Cash is the Currency (Principle #3)
t t t t t t t t t t t t
D. New Venture Financing Involves Search, Negotiation, and Privacy (Principle #4)
t t t t t t t t t
E. A Venture‘s Financial Objective is to Increase Value (Principle #5)
t t t t t t t t t
F. It is Dangerous to Assume that People Act Against Their Own Self-Interests
t t t t t t t t t t t
(Principle #6) t t
G. Venture Character and Reputation can be Assets or Liabilities (Principle #7)
t t t t t t t t t t
1.5 ROLE OF ENTREPRENEURIAL FINANCE
t t t
1.6 THE SUCCESSFUL VENTURE LIFE CYCLE
t t t t
A. Development Stage t
B. Startup Stage t
C. Survival Stage t
D. Rapid-Growth Stage t
E. Early-Maturity Stage t
F. Life Cycle Stages and the Entrepreneurial Process
t t t t t t
1.7 FINANCING THROUGH THE VENTURE LIFE CYCLE t t t t t
A. Seed Financing t
B. Startup Financing t
C. First-Round Financing t
D. Second-Round Financing t
E. Mezzanine Financing t
F. Liquidity-Stage Financing t
G. Seasoned Financing t
1.8 LIFE CYCLE APPROACH FOR TEACHING ENTREPRENEURIAL FINANCE
t t t t t t
SUMMARY
t
DISCUSSION QUESTIONS AND ANSWERS t t t
1. What is the entrepreneurial process?
t t t t
The entrepreneurial process comprises: developing opportunities, gathering resources, and
t t t t t t t t
managing and building operations with the goal of creating value.
t t t t t t t t t t
2. What is entrepreneurship? What are some basic characteristics of entrepreneurs?
t t t t t t t t t
Entrepreneurship is the process of changing ideas into commercial opportunities and creating
t t t t t t t t t t t
value. While there is no prototypical entrepreneur, many are good at recognizing commercial
t t t t t t t t t t t t t
opportunities, tend to be optimistic, and envision a plan for the future.
t t t t t t t t t t t t
3. Why do businesses close or cease operating? What are the primary reasons why businesses
t t t t t t t t t t t t t
fail?
t
, Chapter 6: Managing Cash Flow t t t t 3
Nearly one-half of businesses that fail do so because of economic factors including inadequate
t t t t t t t t t t t t t
sales, insufficient profits, and industry weakness. Many of the economic factors are directly
t t t t t t t t t t t t t
tied to financing concerns (e.g., insufficient profits for investors). Almost 40 percent of
t t t t t t t t t t t t t
business failures not citing economic factors cite specifically financial causes like excessive
t t t t t t t t t t t t
debt and insufficient financial capital. The remaining cited reasons for failure include a lack of
t t t t t t t t t t t t t t t
business and managerial experience, business conflicts, family problems, fraud, and disasters.
t t t t t t t t t t t
tMany businesses close and fail due to financial trouble which is mostly related to lack of sales
t t t t t t t t t t t t t t t t
and unsatisfactory profits.
t t t
4. What are five megatrend sources or categories for finding entrepreneurial opportunities?
t t t t t t t t t t
We identify five megatrend categories. They are: (1) societal changes, (2) demographic
t t t t t t t t t t t
changes, (3) technological changes, (4) emerging economies and global changes, and (5)
t t t t t t t t t t t t
crises and bubbles.
t t t
Under societal changes we discuss the gig economy and the sharing economy. The gig
t t t t t t t t t t t t t
economy is where individuals accept short-term job assignments or ―gigs‖ instead of having
t t t t t t t t t t t t t
full-time employment. The sharing economy is where individuals share their assets, such as
t t t t t t t t t t t t t
homes, vehicles, and personal time, with others to provide a new way for distributing goods
t t t t t t t t t t t t t t t
and services.
t t
5. What asset and financial bubbles have occurred recently? How can bubbles and financial
t t t t t t t t t t t t
crises lead to entrepreneurial opportunities?
t t t t t
The ―dot.com‖ or Internet bubble burst in 2000. An economic recession that began in 2001
t t t t t t t t t t t t t t
was exacerbated by the 9/11 terrorist attack. The housing asset bubble, fueled by sub-prime
t t t t t t t t t t t t t t
mortgages offered to borrowers who could not afford them, burst in 2006. By the second half
t t t t t t t t t t t t t t t t
of 2008, a ―perfect financial storm‖ erupted and possible financial collapse became a reality.
t t t t t t t t t t t t t t
Alternative and renewable energy, accompanied by project credit subsidies, production and
t t t t t t t t t t
investment tax credits, and loan guarantees benefited as a result of the recent financial crisis. These
t t t t t t t t t t t t t t t t
developments and other efforts to stimulate economic activity provided many new entrepreneurial
t t t t t t t t t t t t
opportunities.
t
6. What is e-commerce? Why are the Internet economy and e-commerce here to stay?
t t t t t t t t t t t t
E-commerce involves the use of electronic means to conduct business online. Activities t t t t t t t t t t t
include marketing and selling online and electronic retailing.
t t t t t t t t
The internet economy and e-commerce are here to stay. We will never do business the same
t t t t t t t t t t t t t t t
way we did before the Internet and the Web. Many business plans were funded with the belief
t t t t t t t t t t t t t t t t t
that part of the benefit could be captured by sellers (producers and retailers).
t t t t t t t t t t t t t
However, we now know that the Web so effectively facilitates price competition that it is hard
t t t t t t t t t t t t t t t
for suppliers and retailers to protect margins. E-commerce may not deliver the margins once
t t t t t t t t t t t t t t
conjectured, but the Internet is still one of the most radical innovations in our lifetime.
t t t t t t t t t t t t t t t
, 4 Chapter 6: Managing Cash Flow t t t t
7. What is meant by disruptive innovation? What is the ―sharing economy‖ societal trend?
t t t t t t t t t t t t
An innovation involves the introduction of a new idea, product, or process. A disruptive
t t t t t t t t t t t t t
innovation is an innovation that creates a new market or network that disrupts and displaces an
t t t t t t t t t t t t t t t t
existing market or network.
t t t t
8. Identify the seven principles of entrepreneurial finance.
t t t t t t
The seven principles are:
t t t
(1) Real, human, and financial capital must be rented from owners t t t t t t t t t
(2) Risk and expected reward go hand in hand t t t t t t t
(3) While accounting is the language of business, cash is the currency t t t t t t t t t t
(4) New venture financing involves search, negotiation, and privacy t t t t t t t
(5) A venture‘s financial objective is to increase value
t t t t t t t
(6) It is dangerous to assume that people act against their own self-interests
t t t t t t t t t t t
(7) Venture character and reputation can be assets or liabilities t t t t t t t t
9. Explain the statement: ―The time value of money is not the only cost involved in renting
t t t t t t t t t t t t t t t
someone’s financial capital.‖
t t t
The total cost of renting someone‘s financial capital is typically significantly higher than just
t t t t t t t t t t t t t
the time value of money due to the possibility that the venture won‘t be able to pay. The rent is
t t t t t t t t t t t t t t t t t t t t
risky or uncertain requiring an expected compensation in addition to the time value of money
t t t t t t t t t t t t t t t
for the renting agreement to be put in place.
t t t t t t t t t
10. How do public and private financial markets differ?
t t t t t t t
Public financial markets are markets where standardized contracts or securities are traded on
t t t t t t t t t t t t
organized securities exchanges. Private financial markets are markets where customized
t t t t t t t t t t
contracts or securities are negotiated, created, and held with restrictions on how they can be
t t t t t t t t t t t t t t t
transferred.
t
11. What is the financial goal of the entrepreneurial venture? What are the major components
t t t t t t t t t t t t t
for estimating value?
t t t
The venture‘s financial goal is to maximize the value of the venture to its owner(s). The major
t t t t t t t t t t t t t t t t
components of estimating value are projected free cash flow (cash generated in a specified time
t t t t t t t t t t t t t t t
period that exceeds funds needed to operate, pay creditors, and invest in the assets needed to
t t t t t t t t t t t t t t t t
grow the venture) and its risk (including the timing and realized amount).
t t t t t t t t t t t t
12. From an agency relationship standpoint, describe the possible types of problems or conflicts of
t t t t t t t t t t t t t
interest that could inhibit maximizing a venture’s value.
t t t t t t t t
There are two basic types of conflicts. Owner-manager (agency) conflicts occur when there
t t t t t t t t t t t t
are differences between managers‘ self-interests and the interests of the owners who hired the
t t t t t t t t t t t t t t
