eThesis - Kauppakorkeakoulun sähköiset gradut

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PURPOSE OF THE STUDY The objective of the thesis was to find a way to value investment projects in emerging economy environment. The purpose of the study was to find out how the most common valuation methods lend to emerging economy investment valuation. Such an environment is characterized by incompleteness of the markets, private ownership, high transaction costs and unpredictable changes in environment that can cause sudden changes in asset prices, among other aspects that are contrary to the assumptions of many valuation methods.

METHODOLOGY The methodology used was to find out from the literature the current methods for valuing emerging economy investments, how those methods are used and what kind of challenges are found in their application. A literature study was also used to find out additional considerations applicable in such a valuation. An alternative process for the valuation based on indifference pricing of real options was developed and finally, a valuation of an investment project is carried out using the process developed, in order to gain experience of the practical applicability of the process.

RESULTS In the literature study it was verified that methods such as discounted cashflow analysis together with the cost of equity found though CAPM are problematic in emerging economy setting. It was also found out that using real options pricing based on the indifference prices can be used to include the specific characteristics of emerging economies in the valuation process. The method is also capable of valuing the managerial flexibilities that play important role in dynamic emerging economy environment.