Citigroup SmithBarney (Dollar). Citigroup regularly performs a U.S. dollar-based discount cash flow (DCF) valuation of Petrobrs in

Citigroup SmithBarney (Dollar). Citigroup regularly performs a U.S. dollar-based discount cash flow (DCF)

valuation of Petrobrás in its coverage. That DCF analysis requires the use of a discount rate, which they base on the company’s weighted average cost of capital.

Evaluate the methodology and assumptions used in the 2003 Actual and 2004 Estimates of Petrobrás’ WACC shown in the table on the next page.

Petrobrás Petróleo Brasileiro S.A. or Petrobras is the national oil company of Brazil. It is publicly traded, but the government of Brazil holds the controlling share. It is the largest company in the Southern Hemisphere by market capitalization and the largest in all of Latin America. As an oil company, the primary product of its production has a price set on global markets—the price of oil—and much of its business is conducted the global currency of oil, the U.S. dollar.

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July 28, 2005 March 8, 2005 Capital Cost Components Risk-free rate 2003A 2004E 2003A 2004E 9.400% 9.400% 9.000% 9.000% Levered beta 1.07 1.09 1.08 1.10 Risk premium 5.500% 5.500% 5.500% 5.500% Cost of equity 15.285% 15.395% 14.940% 15.050% Cost of debt 8.400% 8.400% 9.000% 9.000% Tax rate 28.500% 27.100% 28.500% 27.100% Cost of debt, after-tax 6.006% 6.124% 6.435% 6.561% Debt/capital ratio 32.700% 32.400% 32.700% 32.400% Equity/capital ratio 67.300% 67.600% 67.300% 67.600% WACC 12.20% 12.30% 12.10% 12.30%