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

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EVA LILJEBLOM AND MIKA VAIHEKOSKI*

Investment Evaluation Methods and Required Rate of Return in Finnish Publicly Listed
Companies
ABSTRACT
Financial literature advocates the use of the Net Present Value method for the evaluation of investments. Its key parameter is the required rate of return on equity, which is to be calculated using the
Capital Asset Pricing Model or a similar model especially if the company is publicly listed. However, there is ample evidence on companies not necessarily utilizing the NPV method or the CAPM in their capital budgeting and investment evaluation processes. This paper presents results of a survey conducted among the companies listed on the Helsinki Stock Exchange.
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We have four specific aims in this paper. First, we provide empirical results of the popularity of investment evaluation methods in the Finnish companies together with some insights
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into how these methods are used in practice. Second, we analyze how the popularity of these
1 Moore and Reichert (1983) found that 86% of the 298 Fortune 500 firms use some type of discounted cash flow analysis.

INVESTMENT EVALUATION METHODS

AND…

methods has developed during the last three decades, and how the current situation in Finland compares with other countries. Third, we analyze how the required rate of return is set and what is the cost of capital. Finally, we provide insights into the use of the CAPM or multibeta models in publicly listed Finnish companies. The results are based on a recent survey done among the financial managers of the companies listed on the Helsinki Stock Exchange.
The remainder of this paper proceeds as follows. The sample and survey method are discussed in section 2. In section 3 we present the results together with discussion of their implications. The final section offers conclusions and some suggestions for further research.

2 SAMPLE AND METHODOLOGY
To study the questions pointed out earlier, we conduct a survey among the publicly listed companies listed on the Finnish
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