Investment Evaluation Methods and Required Rate of Return in Finnish Publicly Listed Companies

Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18 Chapter 19 Chapter 20 Chapter 21 Chapter 22 Chapter 23 Chapter 24 Chapter 25 Chapter 26 Chapter 27 Chapter 28 Chapter 29 Chapter 30 Chapter 31 The Corporation Introduction to Financial Statement Analysis Arbitrage and Financial Decision Making The Time Value of Money Interest Rates Investment Decision Rules Fundamentals of Capital Budgeting Valuing Bonds Valuing Stocks Capital Markets and the Pricing of Risk Optimal Portfolio Choice and the Capital Asset Pricing Model Estimating the Cost of Capital Investor Behavior and Capital Market

We use Capital Asset Pricing Model (CAPM) approach to calculate the cost of equity. The formula of CAPM is re = rf + β × (E[RMkt] – rf).

For the purpose of calculating the net present value of the project, an appropriate cost of capital has to be calculated at which free cash flows of the project should be discounted. Since the project will be solely financed by selling new shares, cost of equity will be used as the discount rate. Beta for the company can be assumed to be equal to average of the betas of the competitors of the company. This average beta value comes out to be 1.2. Risk free rate is 0.17% while risk premium has been estimated to be 6%. Thus by putting these values in CAPM formula, we can find the cost of equity for the company which is 7.39%.

When making capital budgeting decisions, there are various techniques that can be utilised. Ross et al. (2008) describes that the predominant capital budgeting methods used as being the Net Present value (NPV) method, the Internal Rate of Return (IRR) method, the Payback method, and the Accounting Rate of Return (ARR) method. Conversely, Brealey, Myers and Allen (2011) proposes that the NPV and IRR methods are considered prestige compared to the ARR and the Payback Methods, as they take into account the time value of money. Thus, the following project evaluation will focus on using the NPV and IRR methods.

The historical roots on Return on Investments (ROI) have an extensive historical background which involves the Du Pont system. It is significant to illustrate the major history behind the Return on Investments (ROI) and how the Du Pont system started. The purpose of the Return on Investment (ROI) is to evaluate the efficiency of an investment or compare the efficiency of various investments. In addition to (ROI) share the common class of profitability ratios. Several examples will show how Return on Investments (ROI) and the Du Pont

The capital asset pricing model can be used to calculate the firm's cost of capital, or at least the firm's cost of equity. The cost of equity reflects the firm's cost of using equity capital to finance its operations. The use of CAPM is effective, because the beta is based on market performance of the company's stock. The market is assumed to be capable of making an accurate

• Use the net present value rule, pay back rule and the internal rate of return when analyzing an investment;

(1) Capital Asset Pricing Model (CAPM): This model says that the expected return of a security or a portfolio is equivalent to the rate on the risk-free security plus a risk premium. If the expected return does not meet or exceed the required return, the investment should not be made. We used this CAPM to estimate the cost of capital for Ameritrade. The CAPM formula is Ri = Rf + βi* (RM-Rf) where Rf = the rate of return for a risk-free security, RM = the

This first section of this paper will provide a brief explanation on theoretical rationale for the net present value (NPV) method of investment appraisal and then compare its strengths and weaknesses to two alternative methods of investment appraisal, those of internal rate of return (IRR) and pay-back.

This paper will first look at Dividend Growth Model and Capital Asset Pricing Model theory, then discussing the advantages and disadvantages when apply each of the model. The purpose of this paper is to evaluate each method and examine which is the most suitable method to calculate the cost of equity finance.

Capital budgeting is an investment appraisal, and is the single most important decision made by a company’s finance and exec team. It is the planning process used to determine whether an organization 's long term venture(s) are worth the investment through the firm 's debt, equity or retained earnings. One of the primary goals is to increase the value of the firm to the shareholders. “The process of capital budgeting involves analyzing, evaluating and deciding whether resources should be allocated to a project (Lowengrub session 6 slides)”. Several methods to evaluate incremental cash flows from each possible investment option.

In capital market, people are always seeking for the best investment project. They want to use the least cost to earn the most money. In another way, people always try to find the connection between the risk of an investment and its expected return. Nowadays, the most widely used model is CAPM. CAPM is Capital Asset Pricing Model. CAPM was funded by Jack Treynor (1962), William Sharpe (1964), John Lintner (1965a, b) and Jan Mossin (1966) (Dempsey, 2013). And it is the birth of asset pricing theory. The term ‘CAPM’ illustrates that it can give a proper solution to find the connection between risk and the expected return of the market portfolio under uncertainty conditions (Brealey, Myers and Allen, 2011). It is important for some researchers to help their decision making in capital market. This essay contains four parts. This essay examines firstly is giving a summary theory of CAPM. The second part will talk about the CAPM’s uses and limitations in evaluating the potential investment in a firm’s shares. The third part will talk about limitations and how CAPM to be used as a source of discount rate in capital budgeting for the firm’s direct investments. The forth part will give a conclusion about this essay.

We use the Capital Asset Pricing Model (CAPM) to determine the cost of equity. As

According to the business dictionary, investment appraisal is the technique used to determine if an investment is going to be profitable or not. Investment decision is extremely vital because it is consistently concerned with the future survival, success and growth of the organisation. The primary objective of an organisation is maximization of shareholder wealth; investment must make not only to maintain shareholder’s wealth but also to increase it. To ensure the maximization objective, it is important that the management managing the organisation make best decision that are based on the best information available and use of the most appropriate appraisal techniques.

INVESTMENT APPRAISAL The nature of investment decisions and the appraisal process Non-discounted cash flow techniques Discounted cash flow techniques Allowing for inflation and taxation in DCF Adjusting for risk and uncertainty in investment appraisal Specific investment decisions (lease or buy; asset replacement, capital rationing)