1. Why do you think Petrobrs's cost of capital is so high? Are there better ways, or other ways, of calculating its weighted average cost of capital? Petrobrs stands out in terms of deepwater technol- ogy... but currently lags in the area of cost of capital. We believe that in the long term, if Petrobrs is to become a competitive player in what looks to be the future in underwater fuel exploration, it would be headed in the right direction by expanding interna- tionally, securing its presence in the Golden Triangle, and lowering its cost of capital. WACC reduction could be immediate. If Petrobrs were to acquire one of the North American indepen- dents-which we estimate on average have a WACC in the range of 6% to 8%-it could raise debt at the acquired company and subsequently lower its WACC in the short term. Petrobrs could even cancel some of its own debt and/or issue new debt through the newly acquired entity. We've seen other savvy Latin compa- nies (ie., Cemex via its Spanish subsidiary Valenciana) do this successfully in the past. -"Foreign Expansion Makes Sense at theRight Price," Morgan Stanley Equity Research, January 18, 2002, p. 4Petrobrs stands out in terms of deepwater technol- ogy... but currently lags in the area of cost of capital. We believe that in the long term, if Petrobrs is to become a competitive player in what looks to be the future in underwater fuel exploration, it would be headed in the right direction by expanding interna- tionally, securing its presence in the Golden Triangle, and lowering its cost of capital. WACC reduction could be immediate. If Petrobrs were to acquire one of the North American indepen- dents-which we estimate on average have a WACC in the range of 6% to 8%-it could raise debt at the acquired company and subsequently lower its WACC in the short term. Petrobrs could even cancel some of its own debt and/or issue new debt through the newly acquired entity. We've seen other savvy Latin compa- nies (ie., Cemex via its Spanish subsidiary Valenciana) do this successfully in the past. -"Foreign Expansion Makes Sense at theRight Price," Morgan Stanley Equity Research, January 18, 2002, p. 4