Chapter Two

Financing Decisions / Capital structure

 Topics to be Covered
1. Sources of, and Raising Business
Finance
2. Estimating the Cost of Capital:
Relative Costs and WACC
3. Capital Structure Theories and Practical
Considerations
4. Finance for Small and Medium Sized
Enterprises (SME) – Focus on Ethiopian
Context
2.1. Sources of, and Raising Business Finance/Capital
• Ordinary shares (common stock)
• Preference shares (preferred stock)
• Convertible bonds
• Loan capital/ Finance
– Bank loans
– Corporate bonds
 Ordinary Shares (Common Stock)
• Risk Finance for the investors
• Dividends are only paid if profits are made and
only after other claimants (e.g. lenders and
preference shareholders) have been paid.
• A high rate of return is required by the share
holders as it is more risky.
• Provide voting rights – the power to hire and fire
directors by the shareholders.
• No tax benefit, unlike borrowing to the company
(not tax deductible).
 Preference Shares (preferred stock)
• Lower risk than ordinary shares – and a lower
dividend
• Fixed dividend - payment before ordinary
shareholders and in a liquidation situation
• No voting rights - unless dividend payments are in
arrears
• There are different types:
– Cumulative - dividends accrue (dividend in arrears) in the
event that the issuer/company does not make timely
dividend payments in each period
– Participating - an extra dividend is possible
– Redeemable - company may buy back at a fixed future date
 Loan Capital
• Financial instruments that pay a certain rate of interest until the
maturity date of the loan and then return the principal (amount
borrowed)
 Bank loans or corporate bonds
• Interest on debt is allowed against tax /tax deductible
• Seniority of debt:
– Seniority indicates preference in position over other lenders.
– In the event of default, holders of senior debt must give
preference to subordinated debt.
 Security
• Security is a form of attachment to the borrowing firm’s
assets.
• It provides that the assets can be sold in event of default to
satisfy the debt for which the security is given.
 Convertible Bonds
• A convertible bond is a bond that gives the holder
the right to "convert" or exchange the par amount
of the bond for ordinary shares of the issuer at
some fixed ratio during a particular period.
• As bonds, they provide a coupon payment and are
legally debt securities, which rank prior to equity
securities in a default situation.
• Their value, like all bonds, depends on the level of
prevailing interest rates and the credit quality of
the issuer.
• Their conversion feature also gives them features
of equity securities.
 Cost of Capital

• When we say a firm has a “cost of capital”

of, for example, 12%, we are saying:
– The firm can only have a positive NPV on a
project if return exceeds 12%
– The firm must earn at least 12% to
compensate investors for the use of their
capital in a project.
 Over view of cost of capital
• The cost of capital represents the overall cost of financing to the
firm
• The cost of capital is normally the relevant discount rate to use in
analyzing an investment
• Cost of capital is the weighted average of the required returns of
the securities that are used to finance the firm. We refer to this as
the firm’s Weighted Average Cost of Capital, or WACC.
• Most firms raise capital with a combination of debt, equity, and
hybrid securities.
• WACC incorporates the required rates of return of the firm’s
lenders and investors and the particular mix of financing sources
that the firm uses.
 2.2. Estimating the Cost of Capital: Relative
Costs and WACC
Expected
Return

Risk Premium

Risk-Free
Rate
Time Value
of Money
Risk
Treasury Corporate Preference Hybrid Ordinary
Bond Bond Share Securities Shares
 Significance of cost of capital

• To evaluate investment decision

• To design firms debt policy
• To appraise financial performance of top management
 Cost of capital and risk

• Required rate of return on securities will be

higher if the firm is riskier.
• Risk will influence how the firm chooses to
finance, i.e., the proportion of debt and equity.
• The key fact to grasp is that the cost of capital
associated with an investment depends on the
risk of that investment. This is one of the most
important lessons in corporate finance.
 Cost of Debt (Kd)
• Required rate of return for creditors
• e.g. Suppose that a company issues bonds with a before
tax cost of 10%.
• Since interest payments are tax deductible, the true
cost of the debt is the After Tax cost (Atkd) = Interest
Rate (1 – T), where T is tax rate)
• If the company’s tax rate is 40%, the after tax cost of
debt AT kd = 10%(1-.4) = 6%
• The cost of debt is 6%. Which means that the company
that issued the bond needs to earn a minimum of 6%
rate of return from using the money so that the
creditors can provided with their required rate of return.
 Flotation Costs – cost of issuing securities to
the general public
– Accounting
– Legal
– Printing (prospectus)
– Underwriting (investment banker)
– Filing Fees (SEC)
• The above costs should be taken in to
consideration while computing cost of capital.
 Cont’d
 Floatation costs are costs incurred by a firm when it
raises money to finance new investments by selling
bonds and stocks.
 For example, these costs may include fees paid to an
investment banker, and costs incurred when securities
are sold at a discount to the current market price.
 Because of floatation costs, the firm will have to raise
more than the amount it needs.
 Example
If a firm needs $100 million to finance its new project
and the floatation cost is expected to be 5.5%, how
much should the firm raise by selling securities?
 Floating Cost Adjusted Money Need
= $100 million ÷ (1-.055) = $105.82 million
 The firm will raise $105.82 million, which includes
floatation cost of $5.82 million.
 Exercise
The Tricon Telecom Company is considering a $100
million investment that would allow it to develop fiber
optic high-speed Internet connectivity to its 2 million
subscribers. The investment will be financed using the
firm’s desired mix of debt and equity with 40% debt
financing and 60% common equity financing. The firm’s
investment banker advised the firm’s CFO that the issue
costs associated with debt would be 2% while the equity
issue costs would be 10%. So calculate the weighted
average flotation cost and flotation cost adjusted initial
outlay
 Cost of Preferred Stock

• Cost to raise a dollar of preferred stock.

Required rate kp = Dividend (Dp)
Market Price (PP) - F
• Where,
• Dp = preferred stock dividend
• Pp = Market price per share
• F = flotation costs per share
• Flotation costs reduce the amount of money you
get when you sell preferred stock.
 Cost of Preferred Stock - Example
• Example: You can issue preferred stock with
a market price of $45, and flotation costs of
$3 per share, for a net price of $42 and if
the preferred stock pays a $5 dividend,
• The cost of preferred stock:

Kp= $5/ $42 = 11.9% ------- ($45-$3= $42)

 Cost of Common Equity
• Two Types of Common Equity Financing
– Retained Earnings (internal common equity)
– Issuing new shares of common stock (external common
equity)
Cost of Internal Common Equity (Retained Earnings)
– Management should retain earnings only if they earn as
much as stockholder’s next best investment opportunity
of the same risk.
– Cost of Common Equity = opportunity cost of common
stockholders’ funds.
– Two methods to determine
• Dividend Growth Model
• Capital Asset Pricing Model
 Cost of Common Equity
• Cost of Internal Common Equity (Retained Earnings)
Dividend Growth Model
Ks = D1 + g
Po
Where,
– Ks = cost of internal common equity
– D1 = the next dividend to be paid (--- a year after)
– Po = the current market price of the (common) stock
– g = the projected rate of growth of the company/dividend
• Note that there is no floatation cost
• Example: The market price (Po) of a share of common stock is $60. The
current/prior dividend paid (Do) was $3, and the expected growth rate (g) is 10%.
• If you are given Do, you must calculate D1 (next dividend)
– D1 = Do (1 + g)
– D1 = 3.00 (1.10) = 3.30
• Ks = ( 3.30 /60 ) + .10 = .155 = 15.5%
 Cost of Common Equity
• Cost of New Common Stock /External Common Equity
– Must adjust the Dividend Growth Model equation for
flotation (F) costs of the new common shares.
Kn = D1 + g
Po – F
Where,
– Kn = cost of capital of sale of new common stock
– D1= is the next dividend to be paid
– Po = is the current market price of shares outstanding
– F = is the flotation cost
– g = is the rate of growth
 Cost of Common Equity
• Example: If additional shares are issued, floatation
costs will be 12% of price per share. Do = $3.00
and estimated growth is 10%, Price is $60 as
before. Flotation cost = $60 x .12 = $7.20.
• (Po – F = $60.00 – 7.20 = $52.80)
(D1 = 3.00 x 1.10 = 3.30)
• Kn = D1 + g
Po – F
Kn = (3.30 /52.80) + .10 = .1625 = 16.25%
 The capital asset pricing model approach
 CAPM is to determine the expected or required rate of return for risky investments.
Rj = Rf + bj(RM - Rf)
Where,
Rj is the required rate of return for stock j,
Rf is the risk-free rate of return,
bj is the beta of stock j (measures systematic risk of stock j),
RM is the expected return for the market portfolio.
 CAPM describes the relationship between the expected rates of return on risky
assets in terms of their systematic risk. Therefore the cost of equity depends on:
 The risk-free rate of interest,
 The beta or systematic risk of the common stock returns, and
 The market risk premium.
 Example

A review of current market conditions at the end of

March 2009 reveals that the 10-year U.S. Treasury
Bond yield that is used to measure the risk-free rate was
2.81%, the estimated market risk premium is 6.5%, and
the beta for common stock is 1.20.
Determine the cost of common equity using the CAPM,
as of March 2009.

Cost of equity = Rf + Beta x Market risk premium

=2.81% + 1.20x6.5%=10.61%
 Weighted Average Cost of Capital

• It refers to the total cost of the firm

WACC is useful in a number of settings:
• WACC is used to value the firm.
• WACC is used as a starting point for determining the
discount rate for investment projects the firm might
undertake.
• WACC is the appropriate rate to use when evaluating
performance, specifically whether or not the firm has
created value for its shareholders.
 Weighted Average Cost of Capital
• ABC Corporation estimates the following
costs for each component in its capital
structure:
• Source of Capital
– Cost Bonds (after tax) kd = 6.0%
– Preferred Stock kp = 11.9%
– Common Stock Retained Earnings ks = 15.5%
– New Shares Kn = 16.25%
• ABC’s tax rate is 40%
 Weighted Average Cost of Capital
• If using retained earnings (Internal Equity) to
finance the equity portion:
• WACC = (WTd x AT Kd ) + (WTp x Kp ) + (WTs x Ks)
– WACC = weighted average cost of capital
– WT = the weight, proportion or percentage of each
source/element of capital (% of debt, preferred and
common stock to total finance) (capital structure)
– ATKd = after tax cost of debt
– Kp = Cost of preferred stock
– Ks = Cost of equity (Internal – retained earnings) in the
current assumption. Otherwise, it represents cost of
external common equity.
 Weighted Average Cost of Capital
• Assume that ABC’s desired capital structure is
40% debt, 10% preferred and 50% common
equity.
• WACC = Cost of Debt .40 x 6.0% = 2.40%
+ Cost of Preferred .10 x 11.9% = 1.19%
+ Cost of Int. Equity .50 x 15.5% = 7.75%
= 11.34%
• What does this WACC of 11.34% mean/imply?
 Weighted Average Cost of Capital
• If using new common stock (External Equity) to
finance the common stock portion:
• WACC = (WTd x AT Kd ) + (WTp x Kp ) + (WTs x Ks)
• Then we must use the cost of stock/common
equity adjusted for the Flotation costs.
• WACC = Cost of Debt .40 x 6.0% = 2.40%
+ Cost of Pref .10 x 11.9% = 1.19%
+ Cost of Ext. Eq. .50 x 16.25%= 8.13%
=11.72%
 Marginal Cost of Capital

• ABC’s weighted average cost will change if

one component cost of capital changes.
• This may occur when a firm raises a
particularly large amount of capital such
that investors think that the firm is riskier.
• The WACC of the next dollar of capital
raised is called the marginal cost of capital
(MCC).
 3.3.Capital Structure Theories and Practical Considerations
Definition: What is “Capital Structure”?
• The capital structure of a firm is the mix of
different securities issued by the firm to finance its
operations – mix of sources of finance.
• Securities:
– Bonds, bank loans
– Ordinary shares (common stock), Preference shares
(preferred stock)
– Hybrids, e.g. convertible bonds
• It is financing decision that involves the choice of
an appropriate mix of different sources of financing
namely outsiders funds and owners’ funds.
 Financial Structure
• In the Balance Sheet:
• Current Assets + Fixed Asset = Current Liabilities +
Debt (LT) + Preference Shares + Ordinary shares
Balance Sheet

Current Assets Current Liabilities

Fixed Assets Debt, Financial

Preferred Shares Structure

Ordinary Shares
 Capital Structure
• In the Balance Sheet:
• Debt (LT) + Preference Shares + Ordinary shares in
financing primary the long term/fixed assets
Balance Sheet

Current Assets Current Liabilities

Fixed Assets Debt,

Preferred Shares

Capital
Structure
Ordinary Shares
 Capital Structure (cont.)
• Why should we care about Capital Structure?
• By altering capital structure, firms have the
opportunity to change their cost of capital and –
therefore – the market value of the firm.
• Note , the value of firm (price of share) is:

– Where K is the (weighted average) cost of capital – the

discount factor/rate
• The lower K is the higher the value of the firm,
that is the ultimate goal of firm/ FM.
 Capital Structure (cont.)
• Favorable or positive capital structure is one where
the employment of debt enhances/increases the
wealth of shareholders. It is possible under the
following condition where R > Kd.

• Unfavorable or Negative Capital Structure is one

where the employment of debt decreases the
wealth of shareholders. It is possible under the
following condition where R < Kd.

• Indifferent capital structure is one where the

employment of debt does not effect the wealth of
shareholders. It is possible under the following
condition where R= Kd.
 What is an “optimal” capital structure?
• An optimal capital structure is one that
minimizes the firm’s cost of capital and thus
maximizes firm value / shareholders wealth.
• Cost of Capital:
– Each source of financing has a different cost
– In analyzing capital structure we look at the
Weighted Average Cost of Capital (WACC)
– Capital structure “affects” the WACC
 Optimum Capital Structure Theories: Does it exist?
• Is there any relationship between capital structure and value of
the firm?
• There are two types of theories:
i. Relevant theories: It exists. There is a strong relationship
between value and capital structure.
ii. Irrelevant theories: There is no such optimum capital structure
i.e. capital structure does not affect value of the firm.
• The following are the available capital structure theory in the
literature - theories in relation to Capital Structure :- Debt-
Equity Mix and the Value of the Firm.
 MM theory :
• Zero taxes
• Corporate taxes
• Corporate and personal taxes (Merton Miller )
 Trade-off theory: costs and benefits of leverage
 Signaling theory
 Pecking order
 Windows of opportunity
MM Approach Without Tax: Proposition I

Cost

ko

Debt
MM's Proposition I
 Cont’d
• In other words it states that If the investment
opportunity is fixed, there are no taxes, and capital
markets function well, the market value of a company
does not depend on its capital structure.
• It tells us that the value of the firm is independent of
the firms capital structure under certain assumption.
(No taxes, no costs etc.)
Arbitrage
Cont’d
MM’s Proposition II

Cost
ke

ko

kd

Debt
MM's Proposition II
 Cont’d
 According to MM proposition II as a firm increases
its use of debt, its cost of equity also increases; but its
WACC remains constant.
 • If we ignore taxes, WACC is;
 WACC = RA = (E/V)RE + (D/V)RD ……..V=D+E
RE = RA+ RA-RD (D/E) …….........This is MM
Position II
 Cont’d
 Although changing capital structure of the firm does
not change the firms total value, it does cause
important changes in the firms debt-equity ratio.
 MM Position II tells us that cost of equity depends on
3 things: (1)Required rate of return of the firms cost
of asset, RA, (2) Firms cost of debt RD, and (3) Firms
debt to equity ratio (D/E).
 Example
 The Ricardo Corporation has a weighted average cost
of capital (ignoring taxes) of 12 percent. It can
borrow at 8 percent. Assuming that Ricardo has a
target capital structure of 80 percent equity and 20
percent debt, what is its cost of equity? What is the
cost of equity if the target capital structure is 50
percent equity? Calculate the WACC using your
answers to verify that it is the same.
 solution
 According to M&M Proposition II, the cost of equity,
RE, is:
RE =RA + (RA - RD) * (D/E)
In the first case, the debt-equity ratio is .2/.8 = .25, so
the cost of the equity is:
 RE= 12% +(12%- 8%) * .25=13%
 In the second case, verify that the debt-equity ratio is
1.0, so the cost of equity is 16 percent.
 Cont’d
 We can now calculate the WACC assuming that the
percentage of equity financing is 80 percent, the cost of
equity is 13 percent, and the tax rate is zero: WACC =
(E/V )* RE+ (D/V) * RD=.80 * 13% + .20 *8%=12%
 In the second case, the percentage of equity financing is
50 percent and the cost of equity is 16 percent. The
WACC is: WACC= (E/V ) * RE+ (D/V )* RD= .50 *
16% + .50 *8%= 12%
 As we have calculated, the WACC is 12 percent in both
cases.
 MM Hypothesis With Corporate Tax
 Under current laws in most countries, debt has an important
advantage over equity: interest payments on debt are tax
deductible, whereas dividend payments and retained
earnings are not. Investors in a levered firm receive in the
aggregate the unlevered cash flow plus an amount equal to
the tax deduction on interest.
 The value of the levered firm is equal to the value of the
unlevered firm plus the interest tax shield which is tax rate
times the debt.
 It is assumed that the firm will borrow the same amount of
debt in perpetuity and will always be able to use the tax
shield.
 Cont’d
In short,
 MM proposition I with tax states that a firm’s WACC
decreases as the firm relies more on debt financing
 MM proposition II with tax implies that a firm’s cost
of equity rises as the firm relies more on debt
financing
 MM’s propositions with tax

 MM’s proposition 1
 It states that a firm’s WACC decreases as the firm relies
heavily on debt financing
 WACC=(E/V)*RE+(D/V)*RD*(1-Tc)
• Firm value = value of all equity firm + PV (tax shield)
• Present value of the interest tax shield (TC* D *RD)/RD
= TC* D
 MM’s proposition 2
• The weighted average cost of capital is decreasing with the ratio of
D/E, and the cost of equity is increasing with D/E.
• Re=RU+(RU-RD)*(D/E)*(1-Tc)
 Modigliani and Miller Summary

 I. The No-Tax Case

A. Proposition I: The value of the firm levered equals the value of the firm
unlevered:
VL = VU
Implications of Proposition I:
1. A firm’s capital structure is irrelevant.
2. A firm’s WACC is the same no matter what mix of debt and equity is used.
B. Proposition II: The cost of equity, RE, is
RE = RA + (RA - RD) D/E
where RA is the WACC, RD is the cost of debt, and D/E is the debt/equity
ratio.
 Cont’d
 C. Implications of Proposition II
 1. The cost of equity rises as the firm increases its use of debt
financing.
 2. The risk of equity depends on the risk of firm operations and
on the degree of financial leverage.
 II. The Tax Case

 A. Proposition I with Taxes:

 The value of the levered firm equals the value of the unlevered firm
plus the present value of the interest tax shield:
 VL = VU + TcD
 where Tc is the corporate tax rate and D is the amount of debt.
 Cont’d
B. Implications of Proposition I:
1. Debt financing is highly advantageous, and, in the
extreme, a firm’s optimal capital structure is 100
percent debt.
2. A firm’s WACC decreases as the firm relies more
heavily on debt financing.
 Cont’d
Proposition II with taxes:
 The cost of equity, RE, is:
 RE = RU + (RU - RD)* (D/E)* (1 - TC)
where RU is the unlevered cost of capital, that is, the
cost of capital for the firm if it has no debt. Unlike the
case with Proposition I, the general implications of
Proposition II are the same whether there are taxes or
not.
Optimal Capital structure with tax

 According to M&M proposition with tax, the

optimal capital structure is that firms issue all
the debt.
 In the real world, very few firms issue all the
debt to raise money
 Example on MM I and II with tax

 You are given the following information for the

Format Co.:
 EBIT= $151.52
 TC = .34
 D = $500
 RU = .20
 The cost of debt capital is 10 percent. What is the
value of Format’s equity? What is the cost of equity
capital for Format? What is the WACC?
 Cont’d
 The value of the firm if it has no debt, VU, is:
 VU = EBIT – Taxes=
 RU
EBIT * (1 - TC) =$100/.2=$500
 RU
 From M&M Proposition I with taxes, we know that
the value of the firm with debt is:
 VL = VU + TC * D= $500 + .34 * 500= $670
 Cont’d
 Because the firm is worth $670 total and the debt is
worth $500, the equity is worth $170:
E =VL – D=$670 -500=$170
 Based on M&M Proposition II with taxes, the cost of
equity is:
 RE = RU + (RU - RD) *(D/E) * (1 - TC)
=.20 + (.20- .10) * ($500/170) * (1 - .34)= 39.4%
 Cont’d
 Finally, the WACC is: WACC = ($170/670)* 39.4%
+ (500/670) * 10% * (1 - .34)= 14.92%
 Notice that this is substantially lower than the cost of
capital for the firm with no debt (RU= 20%), so debt
financing is highly advantageous
 MM relationship between value and debt with corporate taxes

Value of Firm, V

VL

TD

VU

0 Debt

• Under MM with corporate taxes, the firm’s value increases

continuously as more and more debt is used--- 100% Debt.
 Trade-off Theory
• MM theory ignores bankruptcy (financial distress) costs,
which increase as more leverage is used.
• At low leverage levels, tax benefits outweigh bankruptcy
costs.
• At high leverage levels, bankruptcy costs outweigh tax
benefits.
• An optimal capital structure exists that balances these
costs and benefits.
– Graham, J. R., and C. R. Harvey, 2001, The theory and
practice of corporate finance: Evidence from the field,
Journal of Financial Economics, 60, 187-243.
 Financial Distress
• It refers to the direct and indirect costs associated with
going bankrupt .
• Financial distress arises when a firm is not able to
meet its obligations to debt-holders.
• For a given level of debt, financial distress occurs
because of the business (operating) risk .
• With higher business risk, the probability of financial
distress becomes greater.
 Bankruptcy Costs
Direct bankruptcy costs
The costs that are directly associated with bankruptcy, such
as legal and administrative expenses.
Indirect bankruptcy costs
The costs of avoiding a bankruptcy filing incurred by a
financially distressed firm.
Financial Distress: Tax Shield vs. Cost of Financial Distress

Maximum value of firm

Costs of
financial distress
Market Value of The Firm

PV of interest
tax shields
Value of levered firm

Value of
unlevered
firm

Optimal amount
of debt
Debt
 Trade-off Theory : Optimum Capital Structure

• Theory that capital structure is based on a trade-off between tax

savings and distress costs of debt.
• MM theory ignores bankruptcy (financial distress) costs, which
increase as more leverage is used.
• At low leverage levels, tax benefits outweigh bankruptcy costs.
• At high levels, bankruptcy costs outweigh tax benefits.
• An optimal capital structure exists that balances these costs and
benefits.
• Value of levered firm =Value of unlevered firm + PV of tax shield –
PV of financial distress
 Pecking Order Theory
• The pecking order theory suggests that there is an order of
preference for the firm of capital sources when funding is
needed.
• The firm will seek to satisfy funding needs in the following
order:
– Internal funds
– External funds
• Debt
• Equity
There are three factors that the pecking order theory is based
on and that must be considered by firms when raising capital.
 Cont’d
1. Internal funds are cheapest to use (no issuance
costs) and require no private information release.
2. Debt financing is cheaper than equity financing.
3. Managers tend to know more about the future
performance of the firm than lenders and
investors. Because of this asymmetric
information, investors may make inferences
about the value of the firm based on the external
source of capital the firm chooses to raise.
• Equity financing inference – firm is currently
overvalued
• Debt financing inference – firm is correctly or
undervalued
 Cont’d
• The pecking order theory suggests that the firm will
first use internal funds. More profitable companies
will therefore have less use of external sources of
capital and may have lower debt-equity ratios.
• If internal funds are exhausted, then the firm will
issue debt until it has reached its debt capacity .
• Only at this point will firms issue new equity.
• This theory also suggests that there is no target debt-
equity mix for a firm.
 Other Capital Structure Theories
Individual Assignment I (accounts for 15%)
Submission date: May 30/2012 E.C.

Instruction: prepare a short note on the following

theories and identify which capital structure theory do you
prefer?
1. Net income Approach
2. Net operating Income Approach
3. Traditional Approach
4. Signaling Theory
5. Windows of Opportunity Theory
Features of an Appropriate Capital Structure
–Return 
–Risk 
–Flexibility 
–Capacity
–Control 
 Individual Assignment II (accounts for 20%).
Submission date: May 30/2012 E.C.
• Prepare a maximum of 10 pages Term Paper on Finance for
Small and Medium Sized Enterprises (SME) – Focus on
Ethiopian Context
Your Term Paper will address the following:
– Describe the financing needs of small businesses.
– Describe the nature of the financing problem for small
businesses in terms of the funding gap, the maturity gap and
inadequate security.
– Explain measures that may be taken to ease the financing
problems of SMEs, including the responses of government
departments and financial institutions.
– Identify appropriate sources of finance for SMEs and
evaluate the financial impact of different sources of finance
on SMEs.