Petrobras Board of Directors has hired to you to assess the company’s cost of capital and asks you to address the following questions in your memo. Explain what is meant by the term “Weighted Average Cost of Capital (WACC)” and why the term should be of importance to the Board. Explain the difference between “sovereign spread” and “currency risk”. Does the sovereign spread compensate for currency risk? Explain if the investor perception of Brazil has an impact on the calculation of Petrobras cost of capital. (Explain your answer in relation to the cost of capital from an equity and debt perspective) Explain if the cost of capital is a relevant factor in the competiveness and strategy of Petrobras. (a simple yes or no is not sufficient – you need to explain your answer)
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