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# Required rate of return of Visa

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In reviewing the background materials of the company "Visa" on the concept of the required rate of return,

1. What factors do you think determine the required rate of return of Visa?

2. Do you think Visa should have a higher or lower required rate of return than the average publicly traded corporation? Or a higher or lower rate of return rate than other companies in the same industry as Visa?

3. Pick two other companies in the same industry as Visa. One should be one that you think should have a lower required rate of return than Visa. The other should be one that you think should have a higher required rate of return. Please in great detail; explain your reasoning as to why these two companies should have a higher/lower required rate of return than Visa.

#### Solution Preview

In reviewing the background materials of the company "Visa" on the concept of the required rate of return,

1. What factors do you think determine the required rate of return of Visa?

The required would depend on the risk. Higher the risk more would be the required return.
We can look at the required rate of return and risk on a stand-alone basis or on a portfolio basis.
On a portfolio basis, the required return depends on the beta of the firm and is given by the CAPM equation -
Required return = Rf + (Rm-Rf) X beta
Rf is the risk free rate
Rm = return on the market
Beta = beta of Visa
Of the three, Rf and Rm ate determined externally to the company and so the rate of return would be dependant on beta of Visa.
Beta is a measure of the systematic risk and measures the volatility in the price of the stock in relation to the volatility of the market. Higher the relative volatility of the stock, higher will be the beta and higher would be the required return.
On a stand-alone basis, the risk arises from the variability in the cash flows of the firm. Higher the variability more is the risk. This risk is measured by the standard deviation of the cash flows.

2. Do you think Visa should have a higher or lower required rate of return than the average ...

#### Solution Summary

The solution explains the factors that would determine the required rate of return of Visa

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