American School of Business Managerial Finance Paper hello, I attached two study cases that needs to be writtien and the book as well they are in chapter 1

American School of Business Managerial Finance Paper hello, I attached two study cases that needs to be writtien and the book as well they are in chapter 11 and 12 Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Marie C. Fields/Shutterstock.com
Entrepreneurial Finance
FOURTH EDITION
J. CHRIS LEACH
The University of Colorado at Boulder
RONALD W. MELICHER
The University of Colorado at Boulder
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
This is an electronic version of the print textbook. Due to electronic rights
restrictions, some third party content may be suppressed. Editorial
review has deemed that any suppressed content does not materially
affect the overall learning experience. The publisher reserves the
right to remove content from this title at any time if subsequent
rights restrictions require it. For valuable information on pricing, previous
editions, changes to current editions, and alternate formats, please visit
www.cengage.com/highered to search by ISBN#, author, title, or keyword
for materials in your areas of interest.
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Entrepreneurial Finance,
4th Edition
J. Chris Leach, Ronald W. Melicher
Vice President of Editorial, Business:
Jack W. Calhoun
Publisher: Joe Sabatino
Executive Editor: Mike Reynolds
© 2012, 2009 South-Western, Cengage Learning
ALL RIGHTS RESERVED. No part of this work covered by the copyright
herein may be reproduced, transmitted, stored, or used in any form or
by any means graphic, electronic, or mechanical, including but not limited
to photocopying, recording, scanning, digitizing, taping, web distribution,
information networks, or information storage and retrieval systems, except
as permitted under Section 107 or 108 of the 1976 United States
Copyright Act, without the prior written permission of the publisher.
Developmental Editor: Adele Scholtz
Marketing Manager: Nathan Anderson
For product information and technology assistance, contact us at
Cengage Learning Customer & Sales Support, 1-800-354-9706
Sr. Content Project Manager: Tamborah
Moore
For permission to use material from this text or product,
submit all requests online at www.cengage.com/permissions
Sr. First Print Buyer: Kevin Kluck
Further permissions questions can be emailed to
permissionrequest@cengage.com
Marketing Manager: Nathan Anderson
Marketing Coordinator: Suellen Ruttkay
Sr. Media Editor: Scott Fidler
Production Service: Cadmus
Sr. Art Director: Michelle Kunkler
Internal Designer: Juli Cook
Cover Designer: Rokusek Design
Cover image: © Denisenko/Shutterstock
Rights Acquisitions Specialist, Text and
Images: Deanna Ettinger
ExamView® is a registered trademark of eInstruction Corp. Windows is
a registered trademark of the Microsoft Corporation used herein under
license. Macintosh and Power Macintosh are registered trademarks of
Apple Computer, Inc. used herein under license.
Cengage Learning WebTutor™ is a trademark of Cengage Learning.
Library of Congress Control Number: 2010942267
Student Edition ISBN-13: 978-0-538-47815-1
Photo Researcher: Martha Hall/PreMedia
Global
Student Edition ISBN-10: 0-538-47815-2
Text permissions researcher:
Christie Barros/PreMedia Global
South-Western Cengage Learning
5191 Natorp Boulevard
Mason, OH 45040
USA
Cengage Learning products are represented in Canada by
Nelson Education, Ltd.
For your course and learning solutions, visit www.cengage.com
Purchase any of our products at your local college store or at our
preferred online store www.CengageBrain.com
Printed in the United States
1 2 3 4 5 6 7 15 14 13 12 11
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
To my wife Martha, our great joys Laura and John, and the Life we share
J. CHRIS LEACH
To my parents, William and Lorraine, and to my wife, Sharon, and our children, Michelle,
Sean, and Thor
RONALD W. MELICHER
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Marie C. Fields/Shutterstock.com
Brief Contents
PART
1
Background and Environment
1
CHAPTER
1
Introduction and Overview
CHAPTER
2
From the Idea to the Business Plan
PART
3
37
2
Organizing and Operating the Venture 79
CHAPTER
3
Organizing and Financing a New Venture
CHAPTER
4
5
Measuring Financial Performance 119
Evaluating Financial Performance 151
CHAPTER
PART
81
3
Planning for the Future 187
CHAPTER
6
Financial Planning: Short Term and Long Term
CHAPTER
7
8
Types and Costs of Financial Capital 231
Securities Law Considerations When Obtaining Venture Financing
CHAPTER
PART
189
269
4
Creating and Recognizing Venture Value 313
CHAPTER
9
CHAPTER
10
PART
5
Valuing Early-Stage Ventures
315
Venture Capital Valuation Methods
361
Structuring Financing for the Growing Venture 405
CHAPTER
11
Professional Venture Capital 407
CHAPTER
CHAPTER
12
13
Other Financing Alternatives 431
Security Structures and Determining Enterprise Values
PART
6
Exit and Turnaround Strategies
457
493
CHAPTER
14
Harvesting the Business Venture Investment
CHAPTER
15
Financially Troubled Ventures: Turnaround Opportunities?
PART
7
495
529
Capstone Cases 563
CASE
1
Eco-Products, Inc.
CASE
2
Coral Systems, Inc.
CASE
3
Spatial Technology, Inc.
565
595
621
v
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Marie C. Fields/Shutterstock.com
Contents
Preface
PART
xvii
1
Background and Environment 1
CHAPTER 1
Introduction and Overview 3
1.1 The Entrepreneurial Process
5
1.2 Entrepreneurship Fundamentals
Who Is an Entrepreneur?
Basic Definitions
6
6
6
Entrepreneurial Traits or Characteristics
7
Opportunities Exist But Not Without Risks
1.3 Sources of Entrepreneurial Opportunities
Societal Changes
7
9
9
Demographic Changes
10
Technological Changes
Crises and “Bubbles”
11
12
1.4 Principles of Entrepreneurial Finance
14
Real, Human, and Financial Capital Must Be Rented from Owners (Principle #1)
Risk and Expected Reward Go Hand in Hand (Principle #2)
14
14
While Accounting Is the Language of Business, Cash Is the Currency
(Principle #3) 15
New Venture Financing Involves Search, Negotiation, and Privacy (Principle #4)
A Venture’s Financial Objective Is to Increase Value (Principle #5)
15
16
It Is Dangerous to Assume That People Act Against Their Own Self-Interests
(Principle #6) 17
Venture Character and Reputation Can Be Assets or Liabilities (Principle #7)
1.5 Role of Entrepreneurial Finance
1.6 The Successful Venture Life Cycle
Development Stage
Startup Stage
22
Survival Stage
22
20
21
Rapid-Growth Stage
22
Early-Maturity Stage
22
Life Cycle Stages and the Entrepreneurial Process
1.7 Financing Through the Venture Life Cycle
Seed Financing
18
19
23
23
24
vii
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
viii
Contents
Startup Financing
25
First-Round Financing
26
Second-Round Financing
Mezzanine Financing
26
27
Liquidity-Stage Financing
Seasoned Financing
27
28
1.8 Life Cycle Approach for Teaching Entrepreneurial Finance
Summary
28
31
CHAPTER 2
From the Idea to the Business Plan 37
2.1 Process for Identifying Business Opportunities
39
2.2 To Be Successful, You Must Have a Sound Business Model
Component 1: The Plan Must Generate Revenues
Component 2: The Plan Must Make Profits
40
40
41
Component 3: The Plan Must Produce Free Cash Flows
42
2.3 Learn From the Best Practices of Successful Entrepreneurial Ventures
Best Marketing Practices
Best Financial Practices
42
43
43
Best Management Practices
44
Best Production or Operations Practices Are Also Important
2.4 Time-To-Market and Other Timing Implications
44
45
2.5 Initial “Litmus Test” for Evaluating the Business Feasibility of an Idea
2.6 Screening Venture Opportunities
46
48
An Interview with the Founder (Entrepreneur) and Management Team: Qualitative
Screening 49
Scoring a Prospective New Venture: Quantitative Screening
Industry/Market Considerations
56
Pricing/Profitability Considerations
Financial/Harvest Considerations
57
59
Management Team Considerations
Opportunity Screening Caveats
61
62
2.7 Key Elements of a Business Plan
63
Cover Page, Confidentiality Statement, and Table of Contents
Executive Summary
Business Description
65
Operations and Support
65
65
66
Financial Plans and Projections
Risks and Opportunities
67
Business Plan Appendix
68
Summary
63
65
Marketing Plan and Strategy
Management Team
51
66
69
Appendix A Applying the VOS Indicator™: An Example
75
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Contents
PART
ix
2
Organizing and Operating the Venture 79
CHAPTER 3
Organizing and Financing a New Venture 81
3.1 Progressing through the Venture Life Cycle
3.2 Forms of Business Organization
Proprietorships
84
85
General and Limited Partnerships
Corporations
82
87
90
Limited Liability Companies
92
3.3 Choosing the Form of Organization: Tax and Other Considerations
3.4 Intellectual Property
96
Protecting Valuable Intangible Assets
97
What Kinds of Intellectual Property Can Be Protected?
97
Other Methods for Protecting Intellectual Property Rights
3.5 Seed, Startup, and First-Round Financing Sources
Financial Bootstrapping
106
Business Angel Funding
108
First-Round Financing Opportunities
Summary
93
103
104
111
112
CHAPTER 4
Measuring Financial Performance 119
4.1 Obtaining and Recording the Resources Necessary to Start and Build a New
Venture 121
4.2 Business Assets, Liabilities, and Owners’ Equity
Balance Sheet Assets
123
Liabilities and Owners’ Equity
4.3 Sales, Expenses, and Profits
4.5 Statement of Cash Flows
125
126
4.4 Internal Operating Schedules
128
131
4.6 Operating Breakeven Analyses
Survival Breakeven
122
133
134
Identifying Breakeven Drivers in Revenue Projections
Summary
138
140
Appendix A NOPAT Breakeven: Revenues Needed to Cover Total Operating Costs
147
CHAPTER 5
Evaluating Financial Performance 151
5.1 Users of Financial Performance Measures by Life Cycle Stage
5.2 Using Financial Ratios
152
154
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
x
Contents
5.3 Cash Burn Rates and Liquidity Ratios
156
Measuring Venture Cash Burn and Build Amounts and Rates
Beyond Burn: Traditional Measures of Liquidity
158
Interpreting Cash-Related and Liquidity-Related Trends
5.4 Conversion Period Ratios
162
Interpreting Changes in Conversion Times
164
166
Measuring Financial Leverage
166
Interpreting Changes in Financial Leverage
5.6 Profitability and Efficiency Ratios
169
169
Income Statement Measures of Profitability
Efficiency and Return Measures
169
171
Interpreting Changes in Profitability and Efficiency
5.7 Industry Comparable Ratio Analysis
PART
173
174
5.8 A Hitchhiker’s Guide to Financial Analysis
Summary
160
161
Measuring Conversion Times
5.5 Leverage Ratios
157
175
177
3
Planning for the Future 187
CHAPTER 6
Financial Planning: Short Term and Long Term 189
6.1 Financial Planning Throughout the Venture’s Life Cycle
6.2 Surviving in the Short Run
191
192
6.3 Short-Term Cash-Planning Tools
194
6.4 Projected Monthly Financial Statements
199
6.5 Cash Planning from a Projected Monthly Balance Sheet
6.6 Beyond Survival: Systematic Forecasting
Forecasting Sales for Seasoned Firms
201
202
203
Forecasting Sales for Early-Stage Ventures
205
6.7 Estimating Sustainable Sales Growth Rates
209
6.8 Estimating Additional Financing Needed to Support Growth
The Basic Additional Funds Needed Equation
Impact of Different Growth Rates on AFN
Estimating the AFN for Multiple Years
213
215
216
6.9 Percent-of-Sales Projected Financial Statements
Forecasting Sales
212
216
217
Projecting the Income Statement
Projecting the Balance Sheet
217
219
Forecasting the Statement of Cash Flows
220
Financing Cost Implications Associated with the Need for Additional Funds
Summary
222
223
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Contents
xi
CHAPTER 7
Types and Costs of Financial Capital 231
7.1 Implicit and Explicit Financial Capital Costs
7.2 Financial Markets
233
233
7.3 Determining the Cost of Debt Capital
235
Determinants of Market Interest Rates
236
Risk-Free Interest Rate
237
Default Risk Premium
238
Liquidity and Maturity Risk Premiums
A Word on Venture Debt Capital
7.4 What Is Investment Risk?
241
243
244
Measuring Risk as Dispersion Around an Average
Historical Return versus Risk Relationships
7.5 Estimating the Cost of Equity Capital
247
250
Cost of Equity Capital for Public Corporations
Cost of Equity Capital for Private Ventures
Sources and Costs of Venture Equity Capital
7.6 Weighted Average Cost of Capital
250
252
254
257
A Life Cycle–Based WACC Example
Summary
244
257
259
Appendix A Using WACC to Complete the Calibration of EVA
267
CHAPTER 8
Securities Law Considerations When Obtaining Venture Financing 269
8.1 Review of Sources of External Venture Financing
8.2 Overview of Federal and State Securities Laws
Securities Act of 1933
271
273
273
Securities Exchange Act of 1934
274
Investment Company Act of 1940
Investment Advisers Act of 1940
274
275
State Securities Regulations: “Blue-Sky” Laws
275
8.3 Process for Determining Whether Securities Must Be Registered
Offer and Sale Terms
What Is a Security?
276
276
277
8.4 Registration of Securities under the Securities Act of 1933
8.5 Security Exemptions from Registration under the 1933 Act
279
282
8.6 Transaction Exemptions from Registration under the 1933 Act
Private Offering Exemption
284
285
Accredited Investor Exemption
286
8.7 SEC’s Regulation D: Safe-Harbor Exemptions
287
Rule 504: Exemption for Limited Offerings and Sales of Securities Not Exceeding
$1 Million 287
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right…
Purchase answer to see full
attachment