SOLUTION MANUAL FOR . .
Entrepreneurial Finance, 7th Edition J. Chris Leach (Author), Ronal
. . . . . . . .
d 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.d
oing.so.we.hope.to.convey.to.you.the.importance.of.understanding.and.applying.entrepreneurial.finan
ce.methods.and.tools.to.help.ensure.an.entrepreneurial.venture.is.successful..We.present.a.life.cycle.ap
proach.to.the.teaching.of.entrepreneurial.finance.where.we.cover.venture.operating.and.financial.deci
sions.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.S
UMMARY
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.val
ue.. While.there.is.no.prototypical.entrepreneur,.many.are.good.at.recognizing.commercial.oppor
tunities,.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,.insuffici
ent.profits,.and.industry.weakness..Many.of.the.economic.factors.are.directly.tied.to.financing.con
cerns.(e.g.,.insufficient.profits.for.investors).. Almost.40.percent.of.business.failures.not.citing.eco
nomic.factors.cite.specifically.financial.causes.like.excessive.debt.and.insufficient.financial.capit
al.. The.remaining.cited.reasons.for.failure.include.a.lack.of.business.and.managerial.experience,.b
usiness.conflicts,.family.problems,.fraud,.and.disasters.. Many.businesses.close.and.fail.due.to.fina
ncial.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.chan
ges,.(3).technological.changes,.(4).emerging.economies.and.global.changes,.and.(5).crises.an
d.bubbles.
Under.societal.changes.we.discuss.the.gig.economy.and.the.sharing.economy.. The.gig.economy.i
s.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,.v
ehicles,.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.cris
es.lead.to.entrepreneurial.opportunities?
The.―dot.com‖.or.Internet.bubble.burst.in.2000.. An.economic.recession.that.began.in.2001.was.e
xacerbated.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.h
alf.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.investme
nt.tax.credits,.and.loan.guarantees.benefited.as.a.result.of.the.recent.financial.crisis..These.development
s.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.includ
e.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.t
he.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.s
uppliers.and.retailers.to.protect.margins.. E-
commerce.may.not.deliver.the.margins.once.conjectured,.but.the.Internet.is.still.one.of.the.most.ra
dical.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.innovat
ion.is.an.innovation.that.creates.a.new.market.or.network.that.disrupts.and.displaces.an.existing.ma
rket.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.some
one’s.financial.capital.‖
The.total.cost.of.renting.someone‘s.financial.capital.is.typically.significantly.higher.than.just.the.ti
me.value.of.money.due.to.the.possibility.that.the.venture.won‘t.be.able.to.pay.. The.rent.is.risky.or.u
ncertain.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.or
ganized.securities.exchanges.. Private.financial.markets.are.markets.where.customized.contra
cts.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.e
stimating.value?
The.venture‘s.financial.goal.is.to.maximize.the.value.of.the.venture.to.its.owner(s).. The.major.com
ponents.of.estimating.value.are.projected.free.cash.flow.(cash.generated.in.a.specified.time.period.t
hat.exceeds.funds.needed.to.operate,.pay.creditors,.and.invest.in.the.assets.needed.to.grow.the.vent
ure).and.its.risk.(including.the.timing.and.realized.amount).
12. From.an.agency.relationship.standpoint,.describe.the.possible.types.of.problems.or.conflicts.of.in
terest.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), Ronal
. . . . . . . .
d 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.d
oing.so.we.hope.to.convey.to.you.the.importance.of.understanding.and.applying.entrepreneurial.finan
ce.methods.and.tools.to.help.ensure.an.entrepreneurial.venture.is.successful..We.present.a.life.cycle.ap
proach.to.the.teaching.of.entrepreneurial.finance.where.we.cover.venture.operating.and.financial.deci
sions.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.S
UMMARY
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.val
ue.. While.there.is.no.prototypical.entrepreneur,.many.are.good.at.recognizing.commercial.oppor
tunities,.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,.insuffici
ent.profits,.and.industry.weakness..Many.of.the.economic.factors.are.directly.tied.to.financing.con
cerns.(e.g.,.insufficient.profits.for.investors).. Almost.40.percent.of.business.failures.not.citing.eco
nomic.factors.cite.specifically.financial.causes.like.excessive.debt.and.insufficient.financial.capit
al.. The.remaining.cited.reasons.for.failure.include.a.lack.of.business.and.managerial.experience,.b
usiness.conflicts,.family.problems,.fraud,.and.disasters.. Many.businesses.close.and.fail.due.to.fina
ncial.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.chan
ges,.(3).technological.changes,.(4).emerging.economies.and.global.changes,.and.(5).crises.an
d.bubbles.
Under.societal.changes.we.discuss.the.gig.economy.and.the.sharing.economy.. The.gig.economy.i
s.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,.v
ehicles,.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.cris
es.lead.to.entrepreneurial.opportunities?
The.―dot.com‖.or.Internet.bubble.burst.in.2000.. An.economic.recession.that.began.in.2001.was.e
xacerbated.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.h
alf.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.investme
nt.tax.credits,.and.loan.guarantees.benefited.as.a.result.of.the.recent.financial.crisis..These.development
s.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.includ
e.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.t
he.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.s
uppliers.and.retailers.to.protect.margins.. E-
commerce.may.not.deliver.the.margins.once.conjectured,.but.the.Internet.is.still.one.of.the.most.ra
dical.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.innovat
ion.is.an.innovation.that.creates.a.new.market.or.network.that.disrupts.and.displaces.an.existing.ma
rket.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.some
one’s.financial.capital.‖
The.total.cost.of.renting.someone‘s.financial.capital.is.typically.significantly.higher.than.just.the.ti
me.value.of.money.due.to.the.possibility.that.the.venture.won‘t.be.able.to.pay.. The.rent.is.risky.or.u
ncertain.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.or
ganized.securities.exchanges.. Private.financial.markets.are.markets.where.customized.contra
cts.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.e
stimating.value?
The.venture‘s.financial.goal.is.to.maximize.the.value.of.the.venture.to.its.owner(s).. The.major.com
ponents.of.estimating.value.are.projected.free.cash.flow.(cash.generated.in.a.specified.time.period.t
hat.exceeds.funds.needed.to.operate,.pay.creditors,.and.invest.in.the.assets.needed.to.grow.the.vent
ure).and.its.risk.(including.the.timing.and.realized.amount).
12. From.an.agency.relationship.standpoint,.describe.the.possible.types.of.problems.or.conflicts.of.in
terest.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
