The Open UniversitySkip to content

Small and medium sized enterprises (SMEs) and their cost of capital

Moro, Andrea; Lucas, Michael and Kodwani, Devendra (2010). Small and medium sized enterprises (SMEs) and their cost of capital. In: International Conference on Management of SMEs 2010, 17-18 Sep 2010, Nagpur, India.

Full text available as:
PDF (Accepted Manuscript) - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Download (123kB)
Google Scholar: Look up in Google Scholar


Existing finance literature is inadequate with respect to its coverage of the capital structure of small and medium sized enterprises (SMEs). This lack of coverage means that SMEs are provided with little or no guidance for optimising their cost of capital. This paper is an attempt to provide such guidance.
For unlisted SMEs the cost of equity cannot be derived from the capital market, nor can it be ascertained by asking the entrepreneurs, since their decision to invest is usually driven by many other factors, over and above the simple (financial) return on investment requirement. A further problem in quantifying cost of equity results from the fact that entrepreneurs can be asked to provide additional (informal) investment in the form of personal guarantees. We put forward a model that attempts to solve these problems. Firstly, our model determines a 'legitimate' expected return for the entrepreneur, by considering the probability of liquidation of the venture and the loss incurred by the entrepreneur in this event. The former can be derived by looking at the specific survival rate of firms; the latter, is based on how much the potential bankruptcy affects the wealth of the entrepreneur. Secondly, we suggest taking into consideration the personal collateral provided by the entrepreneur, as if it were additional equity invested in the venture. To calculate such an amount, we suggest taking into account only the amount of collateralised debt that cannot be covered by the revenue from the sales of the firm's assets in case of liquidation.

Item Type: Conference or Workshop Item
Copyright Holders: 2010 The Authors
Keywords: SMEs; capital structure; entrepreneur
Academic Unit/School: Faculty of Business and Law (FBL)
Faculty of Business and Law (FBL) > Professional Services
Item ID: 24088
Depositing User: Andre Moro
Date Deposited: 10 Nov 2010 10:37
Last Modified: 07 Dec 2018 11:34
Share this page:

Download history for this item

These details should be considered as only a guide to the number of downloads performed manually. Algorithmic methods have been applied in an attempt to remove automated downloads from the displayed statistics but no guarantee can be made as to the accuracy of the figures.

Actions (login may be required)

Policies | Disclaimer

© The Open University   contact the OU