CHAPTER 3: RESEARCH

METHODOLOGY

3.1

RESEARCH FRAMEWORK

INDEPENDENT VARIABLE

DEPENDENT VARIABLE

· Free

Cash Flow

-Dividend Payout

– Depreciation

(Kamran.

M. R et al, 2017)

(Sindhu. M. I, 2014)

· Net

Investment or Net Capital Expenditure

(Kamran. M. R et al, 2017)

3.2

INDEPENDENT VARIABLES

Muzammal Ilyas

Sindhu (2014) stated that free cash flow is defined as accessible cash flow for

resource providers after paying all business expenses, which are necessary for

keeping it into operating form. It is calculated as operating income before

depreciation, less interest expense on debt, less income taxes, less preferred

and common dividends. Thus, free cash flow can be calculated as follows:

1) FCF

= Operating Income + Depreciation – Interest Expense – Income Taxes – Expected

loan (less repayment) – Dividends

2) Dividends

payout = Dividend per Share / Earnings per Share

3) Depreciation

= ((Initial asset cost-terminal value)/economic useful life)

3.3

DEPENDENT VARIABLES

For

dependent variable, to measure the net investment of firms, capital expenditure

can also be a proof of net investment of the firm. Briefly, capital expenditure

is a type of funds where a company invest fixed assets like equipment during

the year and acquiring subsidiaries. Other than that, it is known as a payment

of a business for basic assets such as property, fixtures, or machinery, which increases

the value of company assets and improve productivity. However, it is not for

day-to-day operations such as payroll, inventory, maintenance and advertising. Thus,

net capital expenditure can be calculated as below:

Net

Capital Expenditure = (Current Year – Previous Year)

3.4

DATA ANALYSIS PROCEDURE

REGRESSION MODEL

In order to

understand and model a relationship between two variables, linear regression is

used to observe and analyze the data. These two variables are independent

variable and dependent variable.

Before

starting research model, researcher must determine whether there is an existing

relationship between the two variables. Even though the other variable does not

affect other variable, a significant relationship between the two variable must

be clear and exists. After putting in the data in the SPSS software for the

research’s results, plotting a scatter graph is suitable to decide the capability

of the relationship of the two variables.

However, if

the results does not show a significant relationship between the two proposed

variables, it shows that the linear regression model is not fit as a research

model.

Thus, a linear regression line has an

equation of the form,

Y= ?+bX+?

Where ,

X= the

independent variables

Y= the

dependent variables

b and ?=

intercept (the value of y when x=0)

In this research, it shows that there is actually more than one

independent variables, so there will be more X stated in this equations. Therefore, the complete formula for regression model can be

explained as follows:

Y =B0 +B1X1

+B2X2 +B3X3 + et

Where:

Y = NCE –

Net Capital Expenditure

B0 –

constant

B1, B2, B3, –

regression coefficients

X1 = Free

Cash Flows (FCF)

X2 =

Dividends Payout Ratio

X3 = Depreciation

et

=

Error term/Disturbance term

As this study uses

more than one independent variable, it is more suitable to use a multiple

linear regression model. This type of method is convenient for a research that

requires many factors as it is easier to analyze the results separately. Thus,

the effect of each part can be estimated. This type of research is beneficial

to identify the effect of various simultaneous influences upon a single

dependent variable. The data used for the variables within the selected period

of time were analyzed through descriptive statistics.

3.5

SCOPE OF STUDY

This

study will be done among 32 listed company under Finance sector. All of the

companies are companies that are listed under Bursa Malaysia. In order to get

an accurate result, this study will be conduct using two calculations with the

data from the annual financial report.

This

research will be conduct by calculating for 10 years annual report financial

report from year 2006-2016. All the data collected is from secondary data and

it will be collected in Bursa Malaysia website since the company chosen is

listed in Bursa Malaysia itself. So that, it will become easy in order to

collect the data instead by the company website itself. Other than that, the

data will be collected from Thompson Reuters as a backup for any missing data

that cannot be found in annual financial report.

3.6

RESEARCH HYPOTHESIS

This

research is being conducted in order to measure the relationship of free cash

flow and investment by calculating free cash flow and capital expenditure of

the company.

Regression

Hypothesis:

H01

: Free cash flow has no relationship with Investment

H11:

Free cash flow has a relationship with Investment