FIN 178
Case Study
Petrobras of Brazil
(Chapter 14 – page 399-402)
Case Requirements:
Petrobras Board of Directors has hired to you to assess the company’s cost of capital and asks you to address the following questions in your memo.
1. Explain what is meant by the term “Weighted Average Cost of Capital (WACC)” and why the term should be of importance to the Board.
2. Explain the difference between “sovereign spread” and “currency risk”. Does the sovereign spread compensate for currency risk?
3. Explain if the investor perception of Brazil has an impact on the calculation of Petrobras cost of capital. (Explain your answer in relation to the cost of capital from an equity and debt perspective)
4. Explain if the cost of capital is a relevant factor in the competiveness and strategy of Petrobras. (a simple yes or no is not sufficient – you need to explain your answer)
Address your response of the Petrobras Board of Directors. The due date for this case to be submitted as a memo or letter communication to the aforementioned parties is April 21, 2022.
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Petrobras of Brazil (Chapter 14 – pages 399-402) FIN 178 Case Study
Requirements for the case:
The Petrobras Board of Directors has hired you to evaluate the company’s cost of capital and has asked you to write a letter answering the following questions.
1. Describe what the phrase “Weighted Average Cost of Capital (WACC)” is and why the term is important to the Board.
2. Distinguish between the terms “sovereign spread” and “currency risk.” Is the sovereign spread sufficient to protect against currency risk?
3. Describe how investor perceptions of Brazil influence Petrobras’ cost of capital calculation. (Explain how your solution relates to the cost of capital in terms of equity and debt.)
4. Describe whether the cost of capital is high or low.
