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Petrobras and cost of capital - Essay Example
Cost of capital is in essence the lowest yield an investment project must produce in order to cater for the costs of financing (Eun 2009). An organization’s CA (cost of capital) can be said to be the cost of obtaining debt and the required equity…
Petrobras was operating in a higher risk environment due to Brazil’s economic turbulence. The cost of debt for any given company is the cost of raising extra revenue by issuing the debt. Likewise, the cost of equity refers to that extra revenue associated with issue of the equity shares.
The cost of capital therefore is derived from the average value of issuing the two in the proportion capital they present and this is what is referred to as the WACC (weighted average cost of capital) as to be discussed later in this paper. For a company like Petrobras, the financing costs can be derived by use of the WACC.
The major players in the multinational oil industry as indicated in exhibit 1 of the case have almost a similar cost of capital ranging from 7.6% of BP to 9.0% of ocean energy indicating an average difference of 1.4%. Petrobras’ cost of capital is further up at 15% reflecting a massive difference of 6%. This is largely attributed to the company’s distinct domestic involvement in terms of its operations. The company is largely owned by the government and hence it was solely producing for a Brazilian market in the quest to eliminate its over dependence on international oil imports.
This is despite the economic turbulence of the country’s economy that has been characterized by fluctuations in interest rates, inflation rates, local currency depreciation among other economic downfall, which is further reflected into the company’s CA. ...