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FIN501 MOD3 SLP3-Cost of Equity

FIN501 MOD3 SLP3-Cost of Equity - The Cost of Equity TUI...

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The Cost of Equity ___________________ TUI University December 18, 2011 The Cost of Equity The current Beta for Visa as recorded with NASDAQ on December 14, 2011 is as follows: Beta of Visa= 0.89 (NASDAQ, 2011) Yield to Maturity (Risk free rate)= 11.00% Risk premium= 5.5% “Cost of equity = Risk free rate + Beta * Risk premium” (Zacks Investment Research, 2011) =.11% +.89*5.5% 5.01% Thus when comparing Visa's cost of equity of 5.01% to an average firm’s cost of 10.2% via the S&P 500, Visa should have lower cost of capital as its Beta is lower at .89. Moreover, Visa’s cost of equity is justifiable as Visa is a global pioneer in providing customers with a comprehensive suite of electronic payment products and services. Visa
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products and services include numerous credit and debit card platforms, security features such as fraud protection, and guaranteed merchant payments (Visa, 2011). As of December 17, 2011, Visa’s stock price closed at $97.44 (NASDAQ, 2011). In September 2011, Visa’s total revenue was in excess of $9.188 million, gross profits were $7,074, and Visa enjoyed sales in excess of $9.19 billion (MSN Money, 2011).
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