FIN501 MOD3 CASE3-Cost of Equity Capital

FIN501 MOD3 CASE3-Cost of Equity Capital - The Cost of...

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The Cost of Equity Capital and the CAPM TUI University December 17, 2011 The Cost of Equity Capital and the CAPM The company selected is Visa, a financial services company whose main product is payment services. Since 1958 Visa has been a leading pioneer in credit card platforms and has built a reputation for security, convenience, fraud protection, and guaranteed payments for merchants. Worldwide, Visa has more than 1.9 million ATMs and is the holder of approximately 1.9 billion Visa cards with a volume of over $5.9 trillion (Visa, 2011). Thus three methods exist for estimating the required rate of return for Visa includes the Capital Asset Pricing Model (CAPM), the dividend growth model, and the Arbitrage Pricing Theory (APT). The Dividend growth model is used to calculate the value of stock basing on the expected rate of returns of the dividends. The Capital Asset Pricing Model (CAPM) analyzes likely risks associated with expected return while determining prices allocated to the securities. Additionally, the Arbitrage Pricing Theory is used by investors in accurately pricing the value of securities in a firm. As a result, the APT is determined by security fluctuation and the expected interest rate on venturing with the security--assumed to be risk free (Weaver & Weston, 2008).
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For Visa, the Capital Asset Pricing Model (CAPM) would probably be the best model in estimating a required rate of return (or discount rate). The CAPM assumes that investor-held portfolios are diversified and eliminates unsystematic risks associated with securities. Furthermore, when compared to the dividend growth model, the CAPM method is more appealing to investors because it accounts for the company’s level of systematic risks relative to the market of the stock. The assumptions stipulated in the CAPM, dividend growth model, and arbitrage
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This note was uploaded on 03/25/2012 for the course FIN 501 taught by Professor Dr.joshuashackman during the Winter '10 term at Trident Technical College.

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FIN501 MOD3 CASE3-Cost of Equity Capital - The Cost of...

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