Chapter 7 - Chapter 7: 1. "For the entrepreneur to...

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Chapter 7: 1. “For the entrepreneur to undertake a new venture as safely and successfully as possible, she should raise more money than she needs before starting the venture.” Comment. Answer: This is not a good idea. An entrepreneur who is excessively cautious about the need for initial financing may find that raising a large amount of cash upfront is not feasible. The entrepreneur may be compelled to give up far more of the value of the venture than is necessary or desirable. If the venture is successful in the early stages, cash raised in later rounds will be less expensive for the entrepreneur. 2. What is the “sustainable growth rate,” and how it can be used to plan a new venture financing? Answer: The sustainable growth rate is the percentage growth rate of the venture from one year to the next without having to seek additional equity and without changing the firm’s financial leverage or payout policies. The model for calculating the sustainable growth rate is: R E A A S S t E A r EBIT g * * * ) 1 )( ( ( * - - - = Where * g Sustainable growth rate A Assets E Equity t Tax rate S Sales R Retention ratio r Interest rate on debt The sustainable growth model can be used to see how the sustainable growth rate of the venture varies in response to the policy choices that face the entrepreneur. These choices are conjectural product strategy, leverage, turnover, and retention rate. 3.
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Chapter 7 - Chapter 7: 1. "For the entrepreneur to...

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