JPMorgan. JPMorgans Latin American Equity Research department produced the following WACC calculation for Petrobrs of Brazil versus

JPMorgan. JPMorgan’s Latin American Equity Research department produced the following WACC calculation for Petrobrás of Brazil versus Lukoil of Russia in their June 18, 2004, report. Evaluate the methodology and assumptions used in the calculation.

Assume a 28% tax rate for both companies.

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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Petrobrs Lukoil Risk-free rate 4.8% 4.8% Sovereign risk 70% 3.0% Equity risk premium 4.5% 5.7% Market cost of equity 16.3% 13.5% Beta (relevered) 0.87 1.04 Cost of debt 8.4% 6.8% Debt/capital ratio 0.333 0.475 WACC 14.7% 12.3%