In a report dated June 17, 2003, Citigroup SmithBarney calculated a WACC for Petrobrs denominated in Brazilian

Question:

In a report dated June 17, 2003, Citigroup SmithBarney calculated a WACC for Petrobrás denominated in Brazilian reais (R$). Evaluate the methodology and assumptions used in this cost of capital calculation.

Risk-free rate (Brazilian C-Bond)...............9.90%

Petrobrás levered beta...............................1.40

Market risk premium..............................5.50%

Cost of equity....................................17.60%

Cost of debt.......................................10.00%

Brazilian corporate tax rate.....................34.00%

Long-term debt ratio (% of capital)............50.60%

WACC (R$).......................................12.00%

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...