Visa 2011 Annual Report Download - page 62

Table of Contents
Probability of Exercise-Exercise of the put option is at the sole discretion of Visa Europe (on behalf of the Visa Europe shareholders pursuant to
authority granted to Visa Europe, under its Articles of Association). We estimate the assumed probability of exercise based on reasonably available
information including, but not limited to: (i) Visa Europe's stated intentions; (ii) indications that Visa Europe is preparing to exercise as reflected in its
reported financial results; (iii) evaluation of market conditions, including the regulatory environment, that could impact the potential future profitability of
Visa Europe; and (iv) qualitative factors applicable to Visa Europe's largest members, which could indicate a change in their need or desire to liquidate their
investment holdings.
P/E Differential-The P/E differential is determined by estimating the relative difference in the forward price-to-earnings multiples applicable to our
common stock, as defined in the put option agreement, and that applicable to Visa Europe at the time of exercise. For valuation purposes, the forward price-
to-earnings multiple applicable to our common stock at the time of exercise is estimated by evaluating various quantitative measures and qualitative factors.
Quantitatively, we estimate our P/E ratio by dividing the average stock price over the preceding 24 months (the "long-term P/E calculation") and the last 30
trading dates (the "30-day P/E calculation") prior to the measurement date by the median estimate of our net income per share for the 12 months starting with
the next calendar quarter immediately following the reporting date. This median earnings estimate is obtained from the Institutional Brokers' Estimate System
(I/B/E/S). We then determine the best estimate of our long-term price-to-earnings multiple for valuation purposes by qualitatively evaluating the 30-day P/E
calculation as compared to the long-term P/E calculation. In this evaluation we examine both measures to determine whether differences, if any, are the result
of a fundamental change in our long-term value or the result of short-term market volatility or other non-Company specific market factors that may not be
indicative of our long-term forward P/E. We believe, given the perpetual nature of the put option, that a market participant would more heavily weight long-
term value indicators, as opposed to short-term indicators.
Factors that might indicate a fundamental change in long-term value include, but are not limited to, changes in the regulatory environment, client
portfolio, long-term growth rates or new product innovation. A consistent methodology is applied to a group of comparable public companies used to estimate
the forward price-to-earnings multiple applicable to Visa Europe. These estimates, therefore, are impacted by changes in stock prices and the financial
market's expectations of our future earnings and those of the comparable companies.
Other estimates of lesser significance applied include growth rates and foreign currency exchange rates applied in the calculation of Visa Europe's
adjusted sustainable income. The valuation model assumes a large range of annual growth rates, reflecting the different economic environments and
circumstances under which Visa Europe could decide to exercise. The lowest growth rates assumed reflect Visa Europe's current business model as an
association, owned by its member banks, while the highest reflect a successful shift to a for-profit model in anticipation of exercise. The scenarios with higher
growth rates are assigned a significantly higher probability in the valuation model, as we believe a market participant would more heavily weight these
scenarios as it is likely that, should it choose to exercise its option, Visa Europe will seek to maximize the purchase price by adopting a for-profit business
model in advance of exercising the put option. The foreign exchange rate used to translate Visa Europe's results from Euros to U.S. dollars reflects a blend of
forward exchange rates observed in the marketplace. The assumed timing of exercise of the put option used in the various modeled scenarios is not an overly
significant assumption in the valuation, as obligations calculated in later years are more heavily discounted in the calculation of present value.
Impact if Actual Results Differ from Assumptions. In the determination of the fair value of the put option at September 30, 2011, we have assumed a
40% probability of exercise by Visa Europe at some point in the future and an estimated long-term P/E differential at the time of exercise of approximately
1.9x. The use of a probability of exercise that is 5% higher than our estimate would have
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