5.

0 PROJECT FINANCE ANALYSIS

Our group are invest into a new project to build a 3 storey low cost hotel in Pagoh, Johor.
To realize this project become successfully finished we are using method debt and equity. The
debt and is 30% and 70 % for equity. The total cost to build this low cost hotel is RM 2 210
000.00 compare to the estimate cost RM 3M. By debt we borrowed from bank with Maybank is
30% from our total cost of construction and CIMB will give money with interest of 5%.
Meanwhile from 70% we sell our share to public and to Bursa Saham.

5.1 Equity and Debt

5.1.1 Equity

Equity is the total value of the asset. If want to calculate that value correctly, it must first
account for any debts or other liabilities. Total equity shall be the value minus all liabilities. This
description can refer to personal or corporate property. In other words, if a person buys a
building, its value is the current resale value minus the amount of any unpaid building loan. So
the value of a building worth RM100 000 with outstanding RM30 00 loan has RM70 000 in
equity. Equity can be divided into:

1. Owner equity
Company value held by the owners themselves.
2. Private Equity
Refers to ownership shares in private company.
3. Shareholder Equity
These are stocks available for sale on public exchanges. Each stock share
represents a percentage of ownership in a company.

5.1.2 Debt

Debt is a liability, which means that the lender has a claim on the assets of the company.
Debt due within one year is generally classified as short-term debt on the balance sheet of the
company. Debt due for more than one year is considered to be long-term debt. It is important to
note here that debt usually comes to mind when one considers liabilities, but not all liabilities are
debts.
5.2 Comparison Advantages of Debt and Equity

Debt Equity
Keep the control. Free from debt
-When you agree to the lending institution's -unlike debt finance, A person not paying for
debt financing, the lender has no say in how investment. Not having the debt burden can be
you manage your company. You make all the a huge advantages, especially for small start-
decisions. The business relationship ends once ups.
you have repaid the loan in full.
Tax benefit. Business experience and contacts
- The money you pay in interest is tax- -as well as funds, investors often bring
deductible, essentially raising your net duty. valuable experience, managerial or technical
skills, contacts or networks, and business
credibility.
It's easier to plan. Follow-up funding
A person know well in advance exactly how  - Investors are often willing to provide
much principal and interest you pay every additional funding as the business develops and
month. This makes it easier to budget and grows.
make financial plans.

5.3 Disadvantages of Debt and Equity

 Debt Equity

Requirements for qualifications. Share your gains.

A person need a good enough credit rating to An investors would expect and deserve a
be financed. portion of your income. However, it could be a
worthwhile trade-off if you benefit from the
value that they bring as financial backers
and/or their business acumen and experience.

Discipline. Loss of power.

-A person going to need financial discipline to
-The price to be charged for equity funding and
make payments on time. Use restraint and good all its possible benefits is that you need to
financial judgment when use debt. A company share ownership of the company.

that is excessively debt-dependent could be

seen as 'high risk' by potential investors, and
could at some stage restrict access to equity
financing.
Collateral. Possible dispute.
-By agreeing to provide collateral to the lender, -Sharing ownership and having to work with
some business assets could be put at potential others could lead to a certain amount of tension
risk. You might also be asked to directly and even conflict if there are differences in
vision, style of management and ways of
guarantee the loan, possibly putting your own
running a business. It can be a matter of careful
assets at risk. consideration.
5.4 Comparison Between Debt and Equity

There are many differences between debt and equity. However, there are a few features
that can be modified by community banks for senior secured loans that can make debt financing
appear more like equity. Below is a list comparing the most important debt to equity
characteristics:

Debt Equity
Investor retains ownership Ownership is diluted
Cheaper and tax deductible More expensive financing
Short term financing Long term financing
Must pay back upon change in circumstances Flexibility in dividend payments
Collateral dependent No pledge of security

5.5 Project Finance Analysis Calculation

Estimated cost = RM 3 000 000.00

Debt 30% = RM 900 000.00

Equity 70% = RM 2 100 000

5.5.1 Calculation Of Debt:

I = 5%, , n = 2 years

i
Rd = ( 1+ )n -1
n

0.05 2
Rd = ( 1+ ) -1
2

Rd = 5%
5.5.2 Calculation For Equity:

Using Capital Asset Pricing (CAPM) formula:

The Capital Asset Pricing Model ( CAPM) describes the relationship between systematic risk
and expected return on assets, in particular stocks. CAPM is widely used throughout finance for
pricing risky securities and generating expected returns on assets, given the risk of those assets
and the cost of capital. Below is an example of the formula (CAPM)

E(R) = Rf+ β(E(Rm) - Rf)

Where:

E(R) = Expected return from the share

β = Correlation with the market

E(Rm) = Expected return from the market

Rf = Risk free rate

Rf = 4% β= 2% E(Rm) = 10%

E(R) = Rf+ β(E(Rm) - Rf)

E(R) = 4% + 2%((10%)-4%)

E(R) = 16%
5.6 Minimum Acceptable Rate of Return (MARR)

Debt and equity can clarified to two method which is Weighted Average Cost of Capital
(WACC) and Minimum Acceptable Rate of Return (MARR). For this project definitely choose
WACC as future profit to our company.

5.6.1 What is WACC

The weighted average capital cost (WACC ) is a calculation of the capital cost of a
company in which each category of capital is proportionately weighted. All sources of capital,
including common shares , preferred shares, bonds and any other long-term debt, are included in
the WACC calculation. WACC increases as the beta and the rate of return on equity increases as
the increase in WACC indicates a decrease in valuation and an increase in risk. The method for
calculating WACC can be expressed in the following formula:

E D
WACC = ( Re) + ( Rd)(1-t)
D+ E D+ E

Re = cost of equity

Rd = cost of debt

t = corporate tax rate

E = market value of equity

D = market value of debt

5.6.2 Advantages and Disadvantages of WACC

No advantages disadvantages
1 It uses market data and hence there is Fails to distinguish between projects
less room for manipulation by managers with different risk characteristics
2 It sticks to its target debt and equity mix Reflects average risk that can be
misleading when deciding on
appropriate project
5.6.3 Calculation of WACC

E D
WACC = ( Re) + ( Rd)(1-t)
D+ E D+ E

Re = 16% , E = 70% , D = 30% , Rd = 5% , t = 10%

70 % 30 %
WACC = (16%) + ( 5%)(1-10%)
30 %+70 % 30 %+70 %

WACC = 13.5%