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Review article research results
DOI: https://doi.org/10.21501/2500-669X.2470
Received: 20/04/2017 Accepted: 05/31/2017 Posted: 30/06/2017
Application of Cost of Capital in

SMEs in Colombia: a review one
Application of the capital cost in SMEs in

Colombia: a review
Amanda Lucia Restrepo Londono *

Jorge Ivan Jimenez Sanchez **
Catholic University Luis Amigo, Colombia
How to cite this article in APA: Restrepo Londono, AL and Jimenez Sanchez, JI (July-December 2017). Application of Cost of Capital in SMEs in Colombia: A review. Science
Of Human Action, 2 (2), 167-190.
1 Item Review and the theme "Implementation of Cost of Capital in SMEs in Colombia". It is part of the research project "Utility Application of Value Management in government public accounting of the State Social
Enterprises (ESE) Metropolitan Area Medellín: Case Hospital Venancio Diaz Diaz and Hospital Marco Fidel Suarez" attached to Goras research group in innovation capacity and knowledge management and
accounting group CONTAS, online online environment and society.
* Business Administration and Master in Business Administration from the University of Antioquia, Student Specialization in Finance from the Catholic University Luis Amigo, Medellin, Colombia. Mail: I amanda.restrepo@epm.com.co
** MBA in business administration majoring in corporate finance Vine Universidad del Mar, Chile, corporate financial management specialist, University of Medellin, Colombia. TC teacher, researcher belonging to
Goras Group of the Catholic University Luis Amigó, Email: jijs294@gmail.com
Science of human | Vol. 2 | N or. 2 | pp. 167-190 | July-December | 2017 | ISSN: 2500-669X | Medellin Colombia
Amanda Lucia Restrepo Londoño, Jorge Ivan Jimenez Sanchez
Summary
The aim of this paper is to review the existing literature regarding the cost of capital in Colombia
and especially SMEs, in order to identify the methods and use of this information when seeking
funding sources and optimizing the financial structure. For this a search for investi- gation work
presented for the last 10 years in the country was conducted, finding proposals from the
macroeconomic and financial level, then we count these took place at national level and those
focused on SMEs, to select one of the models that best suit national conditions and apply to
micro, small and medium enterprises in commerce wholesale and retail.
Keywords:
Cost of capital; SMEs; cost of debt; cost of equity.
Abstract
The objective of esta paper is to make a review of the Existing literature Regarding the cost of
capital in Colombia and Specifically in SMEs (small and medium enterprises) in order to Identify
the methods used and the use of esta información When looking for funding sources and Their
financial structure optimized zing. It is Because of this a review of the research papers on this
topic During the last 10 years in the country was made, finding the macroeconomic and Proposals
from financial point of view, subsequently a review of the national level These at focused and
Those on SMEs to select one of the models to the best fit That conditions of the country and
apply it to the micro, small and medium-sized enterprises in the wholesale and retail trade sector.
Keywords:
Cost of capital; SMEs; cost of debt; cost of equity
168 Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

Application of Cost of Capital in SMEs in Colombia: A review
Application of the capital cost in SMEs in Colombia: a review
Introduction
According to the Single Business Registration and Social 2016 94.7% of registered companies in Colombia and
4.9% are micro SMEs, SMEs provide 28% of GDP and generate about 67% employment (Money, 2016), indicating
that they are the engine of the economy and its growth investment is necessary, according to the results of the
survey of business performance in the fourth quarter of 2016, micro, SMEs made investments in infrastructure
improvement or acquisition, new machinery and technology. (ACOPI, 2017).
SMEs finance this investment with equity primarily from income, leaving second to finance the acquired bank
loans, reflecting the low banking penetration of this business segment (ACOPI, 2017). In this situation, companies
seek other forms or forms of financing, so the banking sector is taking interest in expanding the possibilities for
making use of resources leasing, factoring Y confirming, They are seeking to meet the demand for liquidity and
investment financing for SMEs while reducing the cost of borrowing. (Portfolio, 2016).
In this situation, for businesses, especially for SMEs estimate the cost of capital allows clear basis for selecting
sources of financing short and long term and thus optimize its financial structure and generate profitability
(Valderrama, 2010). It is leading to the questioning of the methodology being used to meet the cost they are taking
to make investments. Thus, the objective of this work is to identify the methods used by SMEs in Colombia for
calculating the cost of capital, through studies conducted over the past 10 years in the country and select the one
best suited for micro, small and medium enterprises.
To reach the fulfillment of this goal, the pursuit of the research conducted in the country in the last 10 years, in order to
identify the methodologies most recently used and their contributions to the study of the capital cost nationwide was
conducted, where some of them as the model Weighted average cost of Capital, the CAPM for calculating the cost of
equity and other as Ordinary Least Squares OLS and GARCH were identified.
Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

169
Based on this search, this article is, first this introduction; Secondly, the methodology used; Third, the
development of the subject, that is, the definition of cost of capital; Fourth, the work done for Colombia and fifth,
works made specifically for SMEs, with a practical example of the most successful methodology in Colombia.
Finally, it presents the findings of the study.
1. Methodology
The methodology used for the development of this work by finding existing work and models that explain the cost of
capital is known as Systematic Review (RS), which according to Urra and Barría (2010), is a methodology with great
relevance and credibility in the search, collection, management and analysis of research already done on a specific
topic, its focus is primarily quantitative, without neglecting qualitative studies, used to collect the best possible
evidence of research already carried out.
This methodology was introduced by Barbara Kichenham in the area of software engineering in the year
2004, when he proposed guidelines tailored to the specific problems of the area, which have been followed, evaluated
and updated, where one of the main benefits of the method is that it can be carried out both by experienced researchers
as rookies (Urra & Barria, 2010 ). The process of systematic review (SR) for the review of existing concerning the
application and calculation of cost of capital in SMEs in Colombia was carried out in stages, which are described in
Table 1 have then literature:
Table 1. Stages Systematic Review

Stage Description
one Definition of purpose of the review and formulation of the question. two
Literature search:
Definition of criteria for selecting studies.
Running literature search: once detailed criteria runs in the electronic databases of the study area. 3
Evaluation of the studies found by its relevance to the question. 4
Analysis and synthesis of selected studies: Consider organize, categorize and combine selected to answer the question studies. 5
Results presentation
Source: own calculations based on Urra & Barria (2010) and Castro & Acuña (2011).

To begin the application of the methodology is defined as an objective of the review to identify the methods used by
micro, small and medium enterprises in Colombia for calculating the cost of capital, with the respective question what
methods have been used by SMEs in Colombia for calculating its cost of capital over the last 10 years?
At this point it is necessary to clarify that the time period to be considered is 10 years. Since when evaluating the
quality of the literature review antiquity of the studies consulted where the general recommendation is 5 years
(Merino, 2011) it is included; however, this period can not come to address important research for this research, so
that fits this time to 10 years, ie twice the initial recommendation.
Once the purpose and the question defined, we proceed to make the definition of the criteria and their
combination to select studies; then your search databases available area is performed and, according to the
results, proceed to perform its evaluation according to the review question, by reading the title, keywords and
abstract. At this point it is important to note that the search criteria given in some cases common outcomes among
combinations for which duplicates were eliminated, the result of this first evaluation items were called: promising.
Next, a more detailed assessment of the relevance of articles on the issue proceeds to perform by reading the
abstract, introduction and skiming ( quick read article), to determine whether or not answer the question. Article
result of this evaluation were called: selected, as well as answer the research question, contain studies and results
regarding the cost of capital in Colombia and in some cases to SMEs. Table 2 is the number of items for each of
the groups obtained in the search process (found, promising and selected) and as a result of stages 2 and 3 of the
application of systematic review methodology (RS) .
Table 2. Searching for information in databases

Combination of criteria Database documents Promising Selected documents
found documents
Cost of Capital + Colombia Dialnet 96 9 7
Cost of Capital + SMEs Dialnet 36 two two
Colombia + SMEs Dialnet 145 4 4
Calculation + Cost of Capital Dialnet 108 9 6
Cost of Capital + Colombia Academic google 77 10 8
Cost of Capital + SMEs Academic google 35 24 7
Colombia + SMEs Academic google 31 4 one
Calculation + Cost of Capital Academic google 54 one one
Other documents taken from references of selected documents 14
Total - 582 63 fifty
Source: own calculations based on Castro & Acuña (2011).

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After selecting the relevant documents to address the review questions, we proceed with the analysis and
synthesis of these, where the reading of selected articles and information is made relevant to the article is taken;
further reviewed in the literature sources that may be relevant, as long as they are not included in the initial search
in order to take them as a reference, finally, the presentation of the results found in this document is made.
2. Cost of Capital
The Cost of Capital is defined as " the cost that the company would have assets implies that such figure is the weighted average
cost of different sources that the company uses to finance its assets "( Garcia,
2003, p. 247). From a macroeconomic point of view, it is a key element that directly affects investment decisions in
productive physical capital (Botero, Ramirez, & Palacio, 2007) and is also regarded as assuming a producer when
you use a unit of additional capital in a production process. (National Planning Department, 1993).
This cost associated with the economy depends, among other factors, the price of the good, the interest rate, the
tax rate and the depreciation rate (Steiner & Soto, 1998). In purely financial terms, is the rate of minimum return that a
company must earn on investments made in projects to maintain the value of its shares on the market (Gamma,
2009), also used when discounting or capitalizing cash flows allowing funding decisions or investment (Vargas,
2011).
Derived from these definitions, the cost of the proceeds for investment by increasing liabilities or equity is known as a cost
component, ie, a cost associated with financial liabilities with their involvement in the taxation of the company and cost
associated with resources obtained through increase in equity (Brigham & Houston, 2005), the weighting of the components
of capital and its cost is known as the weighted average cost of Capital WACC and WACC for its acronym in English:
weighted average cost of Capital . (Velez-Pareja & Tham, 2002).
WACC is a widely used method for calculating the cost of using capital for a company or project to identify the rate
at which the company is financing its resources (Molina, 2016). It is a useful tool for determining numbers that can be
used in decision-making and power other models (Child, Rojas, & Montoya, 2010), it is possible to calculate according to
the methodology proposed by Upadhyay and Sriram (2011) expressed in equation 1:
equation 1

Where the variables market value of debt (D), market value of equity (E), cost of debt after taxes are included (
, cost of equity or equity ( . from another
perspective, the WACC can be calculated according to Moscoso, Sepulveda, García and Restrepo (2012) depending on the
financial structure of the company presented in the balance sheet, we refer in Equation 2:
equation 2
According to the above formulation, are two components:
Cost of debt: the debt component is related to assets that are funded by creditors, including bonds, financial
obligations short- and long-term funding providers are, among others. However, for purposes of calculating the
cost only debts that explicitly contain an interest rate are taken, taking into account the tax benefits of debt, where
is the weight of debt in the capital structure, t is the tax rate and It is the cost of
debt before taxes. (Moscoso et al, 2012 and Valderrama, 2010).
Cost of equity: It corresponds to the rate associated with the opportunity to the owners to invest in other assets
including assumed residual payment, since they are the ones who receive their profit after paying all obligations of the
company, in this the contributions made by the partners involved , retained earnings, surplus generated by donations or
revaluations where It is the weight
heritage and is the cost of equity. (Cruz, 2012 and Valderrama, 2010).
3. Cost of Capital in Colombia.
In the last decade in the country, the work presented is highlighted by Moscoso et al. ( 2012) on developments in the cost of
capital for companies in the construction cluster in the Valley of Aburrá in Antioquia during the period between 2005 and 2009.
This WACC calculation is performed based on the cost of debt by interest rate associated with debt (K) found as the ratio of
non-operating expenses and the average value of debt short and long term of the current year and previous year, and the tax
shield (1-t), taking t as the official rate of income tax of Colombia between 33% and 35%, the calculation can be seen in
equation 3:
equation 3

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En segundo lugar, el costo del patrimonio es hallado, mediante el uso del modelo CAPM- Capital Assets Pricing Modelo ( ecuación 4),
que toma como insumo los supuestos propuestos por Cruz, Villareal y Rosillo (2003), Lintner (1965) y Mossin (1966); donde se encuentran,
entre otros, las expectativas homogéneas de los inversionistas sobre los retornos y varianza de activos, es posible prestar y pedir prestado
a la misma tasa de interés libre de riesgo, costo de transacción nulos y los retornos con una distribución normal (Moscoso et al., 2012).:
Ecuación 4
En este modelo las variables a considerar son el retorno libre de riesgo ( ) , la cual corresponde a la
tasa de intervención del Banco de la República de Colombia; la prima de riesgo ( ) , donde
el rendimiento del mercado fue hallado con base en el Índice General de la Bolsa de Valores de Co-
lombia IGBC y el coeficiente Beta del activo ( ) . Para el estudio, dado que las empresas objeto de estudio no
cotizan en bolsa, se utilizan como referencia betas del mismo sector de empresas que si coticen, por lo que para el coeficiente
se tomó el promedio de betas desapalancados ( ) de los sectores de la economía
estadounidense calculados por Damodarán, para luego apalancarlos de acuerdo con las características de las empresas estudiadas
mediante la fórmula de Hamada (ecuación 5), en el caso que las empresas cotizaran en bolsa se tomaría el coeficiente
propio:
Ecuación 5
Sin embargo, de acuerdo con Vélez-Pareja (2011), el valor de la beta puede ser calculado de tres formas: la primera, es hallarlo
partiendo de la desviación estándar de la rentabilidad del mercado, deviación estándar de la rentabilidad del activo y el coeficiente de
relación entre el mercado y el activo (ecuación 6); la segunda opción es partiendo de la covarianza del activo con el mercado y la varianza
del riesgo del mercado (ecuación 7) y la tercera forma es mediante una regresión lineal simple con mínimos cuadrados ordinarios entre la
rentabilidad del mercado y la rentabilidad del activo:
Ecuación 6
Ecuación 7
Since the result of the beta, when equal to 1 indicates that the rate of return of the asset is proportionally variable with the
rate of return in the market. When it is less than 1, the asset has a lower systematic risk than the market can be considered a
defensive investment. When it is greater than 1, the asset is riskier than the average market portfolio, which can be regarded as
an aggressive investment. (Martinez, Ledesma, & Russo, 2013)

The study concludes that the cost of debt in large companies increases in times of crisis and decreases booming;
contrary to what was found for medium, which is likely to require capital injection; meanwhile, the cost of equity presents
moderate growth and therefore the cost of capital, given the weight of this funding source in the composition of the financial
structure. (Moscoso et al., 2012).
Before and after the study Moscoso et al. ( 2012), there have been seeking to adapt the work
model that suits the Colombian case. For this reason, several authors then analyzed and extracted the most relevant with
respect to the capital cost of the proposals submitted; Some of these lead to adapt the basic model, which may be subject to
some variations, such as those proposed by the authors that we reference immediately:
Rivera and Alarcon (2012) and Ten (2016) added variables such as country risk premium, premium regulatory risk and illiquidity
risk premium to the CAPM model; which adjusts the cost of equity in accordance with the specific conditions of the economy and avoid
technical and theoretical to calculate the beta in emerging countries like Colombia restrictions.
Sanchez (2010) explains that the biggest risks affecting investment in developing countries such as Colombia are the sovereign
risk associated with political factors and measured as country risk; the risk of business or commercial, which can be measured by
comparing the volatility of a market developed with the Colombian market and third currency risk associated with the exchange rate,
which can be explained by converting the cash flows into dollars.
Lakes and Neighbor (2014) conducted research focused on the study of the relationship between the application of
governance practices and the cost of capital from debt securities during the period 2007-2010. It is the first search of this
relationship, considering that when referring to component cost of capital debt is usually done in terms of the debt
represented on obligations to financial institutions and not necessarily with other sources of financing such as bonds.
This research yielded results in the financial statements at higher levels of debt, issuers have a lower cost of debt,
contrary to expectations in theory, that may be because the market does not interpret similarly the level of
indebtedness compared to companies other sectors. Now, from the point of view of corporate governance practice,
the relationship with the cost of debt is not significant, since the larger the size of the issuer, the lower the level of
perceived risk and therefore lower the cost of debt (Lagos & Vecino, 2014).

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Santana (2015) estimates the Beta ( ) , for the real estate sector in Colombia, starting from
performance of real estate investment funds through selection of 5 funds, the IGBC and TES government to 10
years, using statistical models ordinary least squares (OLS), time series with autocorrelation of the variables
analyzed (ARMAX) and GARCH. The study concludes that the most successful results are thrown by the GARCH
model, which can be used in estimating the cost of capital projects, since real estate investment funds reflect the
performance of the sector.
Vélez-Pareja (2016) delves into the tax savings observed in the cost of debt as (1-t), since not all come from
interest expense or are not reflected in this equation. It is concluded that the condition for a company to tax
savings is not to pay taxes; but is subject to these and adjusted EBIT (EBIT + Other expenses excluding financial
expenses) is positive. According to the above, the failure to take into account the actual role of the tax savings can
lead to an underestimation of WACC, since the discount rate tax savings may be the cost of unlevered equity.
(Velez-Pareja, 2013).
Molina (2016) presented the relationship between the cost of capital and investment, delivering conclusion that the impact
of the first variable on the second is very low, with an estimated coefficient
- 0.22. Indicating that for every percentage point increase in the cost of capital, investment decreases
0.22%; additionally, are relations between investment with other factors, such as institutional quality, and for each
percentage point increase this variable investment could increase up to 15%.
The cost of capital calculated in the model presented by Molina (2016) does not present the formulation used, however, it
includes seven variables among which are:
I Investment: which takes into account the sum of the changes in balance sheet items of machinery and equipment,
buildings, transport equipment and inventory. Information was taken from the Superintendencia Financiera de Colombia for
3,008 companies in 60 sectors for a period of 13 years (1997-2010).
II The risk-free rate: where bonds US Treasury (Treasury Bonds) were used for 10 years by calculating the average for
each year for which data were obtained from Yahoo Finance.

III The market rate of return in this case the average yield granted by banks for term deposits, usually 90 days,
specifically the DTF with data provided by the Bank of the Republic was used.
IV Country risk: the model used to bring the Colombian case, is the spread you must pay a country for the risk of investing in
it. We used the spread Debt EMBI calculated by JP Morgan, this setting when calculating the cost of capital according to Martinez et
al. ( 2013) is not the best way to adapt the calculation, since the country risk does not affect equally all assets and is not entirely
systematic so a good portion would be diversifiable.
V The TRM Market Representative Rate: in this case, the average of all daily data from the TRM was conducted from
January to December, taking information Grupo Aval.
VI Betas They risk associated sectors of the Colombian industry, were taken as a basis provided by
Damodaran calculated for US industrial sectors that are leveraged by industry, these were unleveraged with the
information of each Colombian industry.
VII Institutional Quality: indicating the perception of institutional quality in a country and is the average of six dimensions Worldwide
Governance Indicator ( WGI) the previous year, these dimensions are: representation and political control, political stability and
absence of violence / terrorism, government effectiveness, regulatory quality, rule of law and control of corruption. This variable
data were taken from The Worldwide Governance Indicators and methodology of Kaufmann, Kraay and Mastruzzi (2010).
In order to verify the accuracy of the model in general and changes made by previous authors we found the
following work, focused on econometric and financial validation of the results presented in the cost of capital in
Colombia:
Ramirez and Serna (2012) by the procedure of Black, Jensen and Scholes (1972), the price information of all shares
listed on the Stock Exchange of Colombia in the period between 2001 and
2010, the IGBC for this period of time, the interbank interest rate, the S & P500 and the rate of Treasury bonds US
to 10 years, concluded that exercise cross-section is that there is no evidence to reject the application the CAPM
model for Colombia; however, this does not imply acceptance.

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Cardona, Gaitan and Velásquez (2017) show the variables that influence the weighted average cost of capital of
companies participating in the IGBC index of the Stock Exchange of Colombia, between macroeconomic is the growth
of the economy, DTF IGBC and profitability and in microeconomic, growth, liquidity, profit margin, tangibility and
Qtobin.
The study concludes that finance the estimated capital cost is associated with the cost of debt and cost of
equity, which do not directly reflect the effect of economic variables; but validate results such as GDP growth
increases positive and contemporaneously the cost of capital, the effects of DTF two periods then reflected growth
in sales that has a negative effect on WACC and liquidity influence and simultaneous positive, showing that the cost
of capital of companies with idle capital turns out to be superior to others.
4. Cost of Capital for SMEs in Colombia.
According to the figures presented by the Ministry of Commerce, Industry and Tourism, SMEs account for over 95% of all
enterprises generate more than 35% of production and create about 65% of employment in Colombia (Vanguardia, 2017),
therefore, are a key factor in the growth of the economy. However, it is undeniable that SMEs are the business segment
facing more obstacles to its development, one of these is seeking financing to support investment and growth of their
businesses. (Sanchez, Osorio, & Baena, 2007).
This leads to the analysis of debt in SMEs, which from a financial point of view is beneficial, although there is
an aversion to this (Caro & Munera, 2010) and considering that SMEs do not go to the banks as the main funding
source (Montoriol, 2007). It is important that the Colombian state drives other financing sources other than bank
credit, such as leasing, factoring, confirming and the stock market by capitalization venture capital (Jimenez Rojas, &
Ospina, 2013).
In Colombia there have been several studies on the subject, among which it has:
Rivera (2007) studied a total of 18 enterprises SMEs in the garment located in the Valle del Cauca sector, with 13
medium and 5 small, whose main objective was to identify the determinants of the capital structure of SMEs in the garment
sector in the Valle del Cauca, without calculating the cost of capital of these.

To find the determinants of capital structure, a model of panel data between variables the cost of debt and
capital structure short-term applied were included. Their results indicate that the rising cost of debt lowers
long-term debt in medium-sized enterprises; However, in small businesses is a positive relationship between the
cost of debt and long-term debt, a situation that can be taken for lack of other financing alternatives or because the
increase in debt cost increases remains. (Rivera, 2007).
Brown, Arias and Portilla (2011) indicate that financing SMEs to be implemented through the pursuit of
financial resources long time to give companies a higher level of tranquility in fulfilling its financial obligations
without affecting cash flow nor the working capital required for operation. Conclusion is counter to the approach
Novoa and Ten (2014), who indicate that small businesses with high growth potential equity financed prefer and
are more profitable those with lower leverage.
Gamma (2009) and Manrique & Salazar (2015) indicate that it is necessary to understand the importance of the
accounting issue in the study of the cost of capital, since in most SMEs in the country shown only the tax component and are
not considered other variables incidents in the cost of capital as a tool for management decision making, in addition to the use
of the tax benefit is not maximized given the low financial literacy that these companies have.
En el estudio presentado por Gamma (2009) se toma como muestra 7 empresas del sector avícola en Bogotá, 1 mediana y 6
pequeñas, donde en primer lugar se realiza el cálculo del uso del capital de forma general para la economía por año, tomando como
referencia el trabajo de Olivera (1993), cuyo principal fin es identificar los efectos de la política fiscal, partiendo del supuesto de que toda la
inversión es importada (Olivera, 1993 y Rhenals, 2005). Como conclusión se tiene la disminución del costo de capital durante el período de
estudio; sin embargo, el autor no expresa las ecuaciones utilizadas para realizar estos cálculos.
Escobar Arias and Portilla (2009) perform the calculation of cost of capital for SMEs, where four cost
components are included. Two associated with debt, these are commercial banks taking the internal rate of return
(IRR) of bank credit, considering that may be indexed and including hidden costs such as study credit and
commission management; and bonds, in this case takes the IRR of the bond issue, which is that long-term
financing through bond issuance costs less to bank credit, as long as the rating of the issuer is good.

179
The cost associated with the assets are shares, in this case the Gordon and Shapiro model is used for valuation of
shares (Equation 8) where Ke is the cost of funding, g is the growth rate of dividends, P is the share price and Do It is the
last dividend paid (Fernandez, 2008). This source of funding, the study indicates that it is more expensive because the
investor is running a greater risk, so they will be charged a higher than third rate:
equation 8
El segundo componente del costo del patrimonio es el capital propio, esto es, cuando una empresa no se financia con ninguna de las
alternativas anteriores, sino con recursos propios, exigirá una retribución por esta inversión, que se puede calcular a través de la Tasa de
Interés de Oportunidad (TIO), para la que el inversionista tiene dos opciones: la primera es utilizar la tasa de rentabilidad de títulos valores
como CDT o bonos y la segunda es utilizar la tasa mínima de rendimiento requerida por los inversionistas que debe ser igual a la suma de
riesgos más la suma de los rendimientos, donde RP es el riesgo país, RC es el riesgo de tipo de cambio, b
es el riesgo sectorial, Ri es el riesgo del inversionista, RB es el rendimiento de los bonos, DTF es el rendimiento de los
CDT y RF It is the risk-free yield, described below in equation 9:
equation 9
This study presents the model for calculating the cost of capital for SMEs. However, no conclusions regarding its
use, which is complemented by the assertions of Vélez-Pareja (2002), when it determines whether to offer alternatives
to calculate the cost of equity, since the best known methods such as CAPM no they are valid in the context of most
enterprises, mainly SMEs, which are not publicly traded and the market risk premium is often negative.
Vélez Pareja (2002) proposes other models like the Accounting Risk Model ( ARM), which is a model developed to
predict risk using accounting information and book value of equity and dividends paid to find the average of the risk
premium of the company, where, It is premium
risk, is the dividend paid in the period t, is the carrying amount of the assets in the period t,
is the risk-free rate, as indicated by the ecuación10:
equation 10
Second, the calculation of the risk-free rate for the year under consideration, where
is the risk-free return of the year, It is the static inflation in the period, is the
risk-free return period, It is the inflation period, as in equation 11:

equation 11
Thus, the cost of equity is calculated as follows:
equation 12
For his part, Perez and Bertoni (2016) presented a proposal to calculate the risk premium associated with the
structure of the cost of capital for SMEs, with two components: the first of these target character related to business
conditions and context, as well as risks abroad
- as credit risk, exchange rate, inflation, shrinking market price volatility, the social, political and legislativos- sector.
The second component is subjective, depending on the risk aversion, whose coefficient is found by AHP
methodology ( Analytic Hierarchy Process).
Toro and Palomo (2011) conducted the analysis for SMEs in Manizales, finding that borrowing 83% of companies
have this risk as the financing structure is supported in greater proportion in liabilities, so the study concludes that the
risk is usually handled intuitively in SMEs without actually quantify and therefore is not part of the definition of the
structure of the cost of capital.
The route of the work done for SMEs in Colombia regarding the use and calculation of cost of capital, still leaves the bad
taste of not having a clear model, defined and standardized, so that different authors make adjustments to the models used
in the world in order to bring them to the case of micro, small and medium enterprises in the country, coming back to the
conclusion Cardona (2010) that SMEs are not clear how to calculate the cost of capital, use of this rate as required for the
return on investment or if adding or destroying value in the company.
4.1. Applying a model Cost of Capital for SMEs in Colombia sector, wholesale and retail
Para el cálculo del costo de capital en Colombia se han presentado en este trabajo alrededor de 25 estudios dedicados a la presentación
de modelos tanto desde el punto de vista macroeconómico como financiero. Para este apartado se seleccionó uno de los modelos
estudiados y se aplicó a las pymes en Colombia, tomando como base la información financiera entregada por la Superintendencia de
Sociedades para el año 2015 a través del sistema de información SIREM.

181
Amanda Lucía Restrepo Londoño, Jorge Iván Jiménez Sánchez
To make the selection of companies, a total of 26,535 who reported information on SIREM in 2015, we
proceeded to identify SMEs according to the value of its assets, resulting in 22,534, ie 84, 92% of all companies
that are subject to the supervision of Super societies; subsequently classified according to the sector of the
economy to which they belong, this can be seen in Figure 1, which is the sector most represented is wholesale
and retail, which was selected to perform the exercise application of the cost of capital for 2015:
Figure 1. Classification SME sector in Colombia 2015
Source: Prepared based on information from the data base SIREM (Superintendencia de Sociedades, 2017).
According to the study, it is considered the most convenient for calculating the cost of capital model is the
Weighted Average Cost of Capital WACC used by Moscoso et al. ( 2012), which is used by most authors looking to
make adjustments to condition the national economy, which proceeds to use information companies to find the
financial structure of these and determine the weights of the debt first and heritage, as in equation 13:
equation 13
Developed steps to reach the calculation of the average cost of capital for micro, small and medium
enterprises in commerce wholesale and retail in 2015 in Colombia are listed below:
Step 1 - Identification of the financial structure: The identification of the financial structure of the companies was
performed by separation by micro, small and medium, on the debt that represents the payment of interest, ie, the
areas of financial obligations in the short and long term, these results can be display for the share of debt in the
financial structure in table No. 3 and equity participation in the No. 4 presented later table.
182 Sci. Hum. Action |Vol. 2 | N o. 2 | julio-diciembre | 2017

Step 2 - Calculating cost of debt: information of the financial statements was used taking the item of interest in the
income statement recorded in the account 530520 of total financial debt, then the rate of income tax of 25% was
applied to find the cost of the debt in force 2015 (Restrepo, 2015) and finally the cost of debt was calculated by the
first part of the equation number 13, multiplying the debt burden for the cost of this once applied the tax shield, the
results of this component are in table 3.
Table 3. Cost of Debt SME sector Wholesale and retail in Colombia 2015
Classification Wd kd Kd (1-t) Wd * Kd (1-t)
microenterprise 35.18% 11.48% 8.61% 3,03%
Little 30.48% 17.64% 13.23% 4.03%
Median 28.56% 16.35% 12.26% 3,50%
Source: Prepared based on information from the data base SIREM (Superintendencia de Sociedades, 2017)
Step 3 - Cost of equity calculation: It was performed with the CAPM used by Moscoso et al. ( 2012), including the proposed
Alarcón Rivera (2012), Ten (2016) and Molina (2016) adjustment, adding the country risk variables and institutional quality,
the formulation is in the equation number 14, where
is the risk-free return, b Beta is variable is the market's performance, RP is the
country risk and CI is institutional quality, as indicated in equation 14:
equation 14
As risk-free rate, , the average yield was taken during the 2015 Bonds
the Colombian government with a maturity of 10 years of 7.32% (Investing.com, 2017c) for market performance,
, two alternatives were taken, the first based on performance during the COLCAP
2015, this being negative with a fall of 23.75% (Investing.com, 2017B) given the behavior of oil prices and the influence of
enterprises of this industry in the index for that reason was adopted as a second alternative proposed by Molina (2016)
taking the average of the DTF 2015 of 4.55% (Bank of the Republic of Colombia, 2017).
Beta variable was taken as reference the levered Beta Exito 1.13 (Investing. Com, 2017th) was subsequently
unleveraged according to their financial structure 2015 and levered again for companies in the sample, using the
formulas presented in equations 15 and 16:
equation 15
equation 16

183
For adjustment variables to the model CAPM, even though the beta coefficient is taken from a company
located in Colombia, as has operations abroad is required adjustments to national conditions and therefore took
the country risk as EMBI + JP Morgan, taking the series 2015 and finding the average of this variation with a result
of 0.25% (ambito.com, 2017) and finally the variable Institutional Quality was taken of the results Global
Governance Indicators ( Worldwide Governance Indicators) 2015, considering the six dimensions of governance,
resulting to Colombia an additional premium of 1.31% (The World Bank Group, 2017).
The results of the cost of equity for SMEs analyzed are presented in Table 4, where you can observe the
variation for the cost calculated market performance based on the COLCAP and calculated according to the DTF,
considering that given the COLCAP negative performance is closer to reality with the DTF results:
Table 4. Cost of equity SME sector Wholesale and retail in Colombia 2015
Classification wp kp Colcap kp DTF Wp * Kp Colcap Wp * Kp DTF
microenterprise 64.82% 1.60% 8.23% 1,04% 5.33%
Little 69.52% 1,59% 8.23% 1,10% 5.72%
Median 71.44% - 2,06% 7.90% - 1,47% 5,65%
Source: Prepared based on information from the data base SIREM (Superintendencia de Sociedades, 2017), (Investing.com, 2017B), (ambito.com,
2017), (Bank of the Republic of Colombia, 2017) (The World Bank Group, 2017)
Step 4 ?? Calculation Cost of Capital: Finally, calculate the cost of capital is done by adding the cost of debt
and the cost calculated with the DTF as risk-free rate properties, results for SMEs in commerce wholesale and
lower in 2015 are in table 5, where you can observe that small businesses are those that have a higher capital cost
followed by medium and micro enterprises, above following the behavior of the cost of debt generated by a higher
value of interest paid in the year of study:
Table 5. Cost of Capital SME sector Wholesale and retail in Colombia 2015
Classification cost Debt cost Heritage Cost of Capital
microenterprise 3,03% 5.33% 8.36%
Little 4.03% 5.72% 9.75%
Median 3,50% 5,65% 9,15%
Source: Prepared based on information from the data base SIREM (Superintendencia de Sociedades, 2017), (Investing.com, 2017B), (ambito.com,
2017), (Bank of the Republic of Colombia, 2017) (The World Bank Group, 2017)
According to the results of the cost of capital for SMEs in the retail sector wholesale and retail, is that the
financial principle, where Kp> Kd (1-t), thereby ensuring that investors have fulfilled superior performance given
the greater risk assumed by investing capital in companies and not act as creditors, in addition, the average value
is delivered over the performance delivered by treasury bonds to 10 years and the DTF.

conclusions
The cost of capital in Colombia has presented many studies addressing this concept from the macroeconomic and financial
perspective, presenting results that validate its application in both disciplines; However, there are studies conducted by
researchers associated with universities and government entities that reference the cost of using capital from a
macroeconomic perspective and not from the application and calculation of these enterprises.
For work performed focused on the business sector is the main source of financial information is provided by the
Superintendency of Corporations through Information System and SIREM Business Report, which realizes the
availability and ease of access, which It allows researchers to deepen the understanding of the evolution of the cost of
capital for companies in the country.
The application of the capital cost in Colombia is performed using models known internationally as the Weighted
Average Cost of Capital -CPPC- and the cost of equity for the Capital Assets Pricing Model -CAPM-, to which some
adjustments are made in order to bring the results at national level, for evidence to accept or reject these models
coming to the conclusion that there is no reason to reject them, but not to accept them completely.
Micro, small and medium enterprises in Colombia have been the subject of many studies, both financially and
its contribution to GDP growth, employment and investment; However, there are studies whose main objective is
to identify the models used for calculating the cost of capital, the closest they have in some of its objectives identify
if they know the cost of the investments made.
The results delivered by the proposed for calculating the cost of capital for SMEs model, part of the basic model
weighted average cost of capital WACC, with adjustments for country risk and institutional quality for the sector of
wholesale and retail they are consistent with the situation of the national economy in 2015, being on average 9.09%
above investment in treasury bonds to 10 years or the DTF.

185
For SMEs in the trade sector wholesale and retail Colombia 2015 it is met with financial principle Kp> Kd (1-t) considering
that the yield obtained by investors or business owners is higher than it is expected to be paid to third parties as
financial income or interest, which encourages investment in these businesses.
The results of the literature review and exercise performed in this study can serve as a basis for further
research to be interested in the cost of capital for SMEs in the country, even for those unlisted companies through
design of a methodology for calculating the cost of equity, considering the characteristics of the national economy
variables.
Conflict of interests:
The author states the absence of conflict of interest with trade association or institution of any kind.
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Review article research results

Received: 20/04/2017 Accepted: 05/31/2017 Posted: 30/06/2017

Application of Cost of Capital in

Application of the capital cost in SMEs in

Amanda Lucia Restrepo Londono *

Catholic University Luis Amigo, Colombia

168 Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

Table 1. Stages Systematic Review

Definition of criteria for selecting studies.

170 Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

Table 2. Searching for information in databases

Cost of Capital + SMEs Dialnet 36 two two

Colombia + SMEs Dialnet 145 4 4

Calculation + Cost of Capital Dialnet 108 9 6

Cost of Capital + Colombia Academic google 77 10 8

Cost of Capital + SMEs Academic google 35 24 7

Colombia + SMEs Academic google 31 4 one

Calculation + Cost of Capital Academic google 54 one one

Other documents taken from references of selected documents 14

Total - 582 63 fifty

Source: own calculations based on Castro & Acuña (2011).

Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

weighted average cost of Capital . (Velez-Pareja & Tham, 2002).

172 Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

According to the above formulation, are two components:

debt before taxes. (Moscoso et al, 2012 and Valderrama, 2010).

revaluations where It is the weight

3. Cost of Capital in Colombia.

Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

tasa de intervención del Banco de la República de Colombia; la prima de riesgo ( ) , donde

se tomó el promedio de betas desapalancados ( ) de los sectores de la economía

rentabilidad del mercado y la rentabilidad del activo:

an aggressive investment. (Martinez, Ledesma, & Russo, 2013)

174 Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

structure. (Moscoso et al., 2012).

which can be explained by converting the cash flows into dollars.

Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

includes seven variables among which are:

3,008 companies in 60 sectors for a period of 13 years (1997-2010).

176 Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

systematic so a good portion would be diversifiable.

January to December, taking information Grupo Aval.

Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

4. Cost of Capital for SMEs in Colombia.

businesses. (Sanchez, Osorio, & Baena, 2007).

178 Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

is the risk-free rate, as indicated by the ecuación10:

risk-free return period, It is the inflation period, as in equation 11:

180 Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

Thus, the cost of equity is calculated as follows:

return on investment or if adding or destroying value in the company.

Sociedades para el año 2015 a través del sistema de información SIREM.

Sci. Hum. Action | Vol. 2 | N or. 2 | July-December | 2017

Figure 1. Classification SME sector in Colombia 2015

182 Sci. Hum. Action |Vol. 2 | N o. 2 | julio-diciembre | 2017

microenterprise 35.18% 11.48% 8.61% 3,03%

Little 30.48% 17.64% 13.23% 4.03%

Median 28.56% 16.35% 12.26% 3,50%

the formulation is in the equation number 14, where

is the risk-free return, b Beta is variable is the market's performance, RP is the

country risk and CI is institutional quality, as indicated in equation 14: