Case Study

Around 2 pages

The response should be a formal memo/communication to the Petrobras Board of Directors as if you were hired as consultant to educate the Board about the concept of cost of capital. Do not respond in Question 1, 2, 3 response format. Please contact me if the directions are not clear to you.

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)
4. Explain if the cost of capital is a relevant factor in the competiveness and strategy of Petrobras. If your answer if affirmative, explain how the cost of capital impact affects competitiveness.

Address your response of the Petrobras Board of Directors.