Cost of Capital

Figure 1: Visa's Weighted Average Cost of Capital created on excel

The first step of WACC is to find long term debt and common equity. I found debt directly on the balance sheet. To calculate common equity I found both the outstanding shares and current stock price from Valueline.

The next component for calculating WACC is the component cost. Figure 2 below shows the two components, cost of debt and cost of equity.

Figure 2: Visa's cost of debt and cost of equity created on excel

I found the cost of debt easily by calculating the pre-tax cost found on Visa's Valueline and multiplied by the 2021 tax rate.

The first method to calculate cost of equity is the Discounted Cash Flow model. I found both the dividend and price from Valueline. The 5% percent long term growth was an assumption I made based on the Prefroma growth rate calculation from 2022 to 2032. Since growth rate percentage was 18.95% in 2022, 12.74% in 2023, and 11.20% in 2024 I concluded that 5% would be an appropriate long term growth rate for Visa.

The Capital Asset Pricing Model is the second way to calculate cost of equity. To calculate this, I took the riskless rate of 10Yr Government Yield from Factset as well as the beta of Visa from Valueline. The market risk premium was the median average from the United States in 2021. To find the CAPM I added these three variables together.

After I found both the DCF and the CAPM model, I averaged them together to find my cost of equity. Since they were both considerably higher than my cost of debt, I felt an average was an appropriate assumption for the cost of equity.

Finally, to calculate the WACC I multiplied the cost of debt and equity with their weight and added them together. Visa's WACC for 2021 was 6.77%.

Sources:

https://research.valueline.com/research#sec=company&sym=V

https://my.apps.factset.com/navigator/company-security/snapshot/V-US