4.1 Financial model assumptions Representing the financial performances of a project implies some basic assumptions that are the foundations of the project itself. Concerning this research, the assumptions are related to the type of loan and type of repayment method used for the analysis. Furthermore, the following input information is needed to set up the financial model: cost of equity, cost of debt, tax rate, and tax shield in Malaysia. The information is aggregated through a literature review. In Malaysia, banks offer two types of loans: Islamic and Conventional. However, the latter accounts for 90 % of the total debt sources of funding and, generally, banking institutions offer plain-vanilla mortgages at a fixed or variable interest rates( Endut et al. 2008). This research applies the standard type and fixed interest rate repayment system: the payments are equals each year and at the beginning a greater amount of the interest is paid. Several models could be applied to estimate the cost of equity. According to the literature the Malaysian cost of equity can be estimated around 14 %( Boubakri et al. 2012) and, according to the Malaysian Central Bank, the effective debt rate floats around 4.85 %. Finally, the last parameter is the tax the Malaysian government imposes on the local companies. The Malaysian tax rate is at 24 % and the Malaysian government considers any interest paid on outstanding debt as tax deductible( Pricewaterhouse Coopers 2014).
4.2 Cash flow analysis The first step involves the identification of the capital structure. Different percentages of debt are analysed. Then, the capital structure that maximizes the financial leverage is the one that satisfies the minimum DSCR target. The DSCR is calculated with equation( 4). The cash flows of both MUCB and MUGB are then estimated: each individual inflow and outflow is evaluated on yearly basis over 30 years of buildings operation. The element considered in the cash in is the operating revenue; it is considered as the minimum level of income needed in order to consider the project bankable. Hence, the operating revenue as defined above is strictly related to the financial leverage and it is computed with the formula:
( 5)
Where NOI is the Net Operating Income and the OPEX is the Operating expenditure. The cash out considered in the analysis are the operational expenditure, the tax payment, loan interest payment and principal. The tax payment is simply the tax rate applied to the taxable income; the debt instalment( principal plus interest) instead is computed as follows:
( 6)
Where M is the monthly debt instalment; L refers to the loan amount; I is the interest rate; and n the loan period. Finally, the present value of the future cash flows is determined and the WACC is used as the discount rate; the WACC is considered the best rate to use in order to take into account the time value of money and the risk uncertainty when dealing with levered capital. The WACC is computed by applying Equation( 2). Table 4 shows the cash flow analysis.
104 ZEMCH 2015 | International Conference | Bari- Lecce, Italy