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Petrobrás Cost Of Capital Essay

727 Words3 Pages

INDIVIDUAL ASSIGNMENT (CASE STUDY) 3
1. In my opinion, I think the cost of capital of Petrobrás is high due to its business which was undiversified internationally. Unlike with the other oil producing multinationals, it was a national oil company which located in Brazil and only served the domestic market. This caused Petrobrás lost the chance of getting source capital in cheaper markets. The company was exposed to a higher risk as the country risks and currency risks such as government policies, inflation and foreign exchange rate would affect the company easily and further led to a higher cost of capital. Besides, the high charges of Brazilian sovereign spread, which was caused by the country’s high inflation, currency devaluation and depreciation …show more content…

In theoretical, the method of using sovereign spread will not compensate for currency risk. It is actually related to the country risk and reflects the creditworthiness of Brazilian government if they want to borrow the United States dollar-denominated debt. Meanwhile, the currency risk indicates the possibility of value of Brazilian Reais will fluctuate greater than value of United States dollar. However, the Petrobrás’ share price is having a high correlation with EMBI+ sovereign spread that borne by Brazil. Hence, if the sovereign spread is continuing to use by the investors to compute Petrobrás’ cost of capital, it will reflect the risk involved that due to the changes in the exchange rate. Thus, in this case, the sovereign spread will compensate for currency …show more content…

Cost of capital (WACC) is employed by the securities analysts all the time in order to value and select the investments. It becomes one of the vital consideration for potential investors as it is concerning to Brazil’s capital market imperfections. The WACC can be computed by including both cost of equity and cost of debt. However, the cost of equity that calculated by applying the Capital Asset Pricing Model is including the risk free interest rate, which will be affected by the country risk. Besides, Petrobrás is a base Brazilian portfolio will create a high beta of the company. Thus, the company’s cost of equity will increase and the WACC rise. If the potential investors use base of global NYSE portfolio, the company’s WACC will be greater.
4. Yes, I agree that the cost of capital is a vital factor in determining a company’s like Petrobrás’ competitiveness and strategy. If a company’s cost of capital is high, the required rate of return by investors also increase and will lead to fewer projects that can be undertaken. However, the factors such as corporate strategy, nature of industry and some external environments also will affect a company’s competitive

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