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