Petrobras Case Summary

1) Why do you think Petrobras’ cost of capital is so high? Are there better ways, or other ways, of calculating its weighted average cost of capital?

Petrobras has high cost of capital because of several factors such as lack of international diversification, they only being listed publicly in Sao Paulo in 1997 and on the New York Stock Exchange (NYSE: PBR) in 2000. They seem to only focus on domestic market rather than internationally. Furthermore, they have high sovereign spread which means they have higher different in the yield compared against the US Treasury. Brazilian government had to pay higher additional yield of dollar funds to the global market as compared to lower paid made up by US Treasury. The higher the yields give greater risk to the investor and US Treasury have better sovereign and creditworthiness rating compared to Brazil that have political stability and economic growth problem. The better ways to calculate the weighted average cost of capital is by diversify the business and market international to reduce the risk as well as reducing the capital cost. Next, try to reduce the weighted average of capital (WACC) by changing the composition of the debt and equity capital on the cost structure by the reducing the amount of them and being alert with the volatility happen in sales and

In this case, the sovereign spread is compensating for currency risk. There have similarities of characteristics between currency risk and country risk. Basically, currency risk is risk arises due to the changes in exchange rate while country risk is risk that arise when investing in a foreign country. The higher the sovereign spread means the higher the demand for the dollar to balance the yield. The share price is correlated with the sovereign spread so the investor must calculate the weighted average cost of capital that reflects the currency