Cost of Capital and Economic Value Added of Small and Medium Enterprises (SMEs) in Nigeria

ABSTRACT

This study examined the implications of various cost of capital on the economic value added of quoted small and medium scale enterprises in Nigeria. Specifically, three costs were identified as follows: cost of debt, cost of equity and weighted average cost of capital. The general objective was to investigate the extent to which weighted average cost of capital influences economic value added of small and medium scale enterprises while the specific objective was to examine the impact of cost of equity and cost of debt independently on economic value added of quoted small and medium scale enterprises in Nigeria. Ten-year time series (2008-2017) and cross sectional data were collected from ten quoted small and medium scale enterprises listed in the alternative securities investment markets of Nigeria Stock Exchange. Two panel data regression models were formulated with one dependent variable (economic value) and two independent variables (cost of debt and cost of equity) in model I and one independent variable (weighted average cost of capital) in model II. The study adopted fixed effect as best of fit for the two models after model validation with the aid of Hausman test with the result of probabilities (< 0.05). It was discovered that cost of equity, cost of debt, and weighted average cost of capital have negative and significant effects on the economic value added of quoted small and medium scale enterprise in Nigeria. We recommended the need for the small and medium enterprises owners to get their businesses listed in capital markets in order to have access to alternative sources of finance and cheaper cost of capital in order to achieve a sustainable economic value creation.