A three-phase approach to construction borrowing decisions

Abstract

In this turbulent environment, construction companies should determine a target capital structure so that they have sufficient and affordable capital to run their projects. This involves the estimation of the cost of capital. When considering the costs and benefits of debt and equity, the selection of banks for debt financing would affect the computation of the gearing ratio. Methods that are able to compute reliable estimations should be developed. The current article therefore aims at introducing a three-phase approach to construction borrowing decisions. In the first two phases, the data envelopment analysis (DEA) was used to estimate the relative efficiencies of the target banks and the available financial sources, respectively. In the last phase, a custom-made dynamic model was formulated to estimate the periodic loans required from the sources. A numerical example was used to demonstrate and justify the usefulness of the approach.