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 Petrobras's WACC below.
Answer to relevant QuestionsIn a report dated June 17, 2003, Citigroup SmithBarney calculated a WACC for Petrobrás denominated in Brazilian reais (R$). Evaluate the methodology and assumptions used in this cost of capital calculation. How do tax treaties affect the operations and structure of MNEs? What is a foreign tax credit? Why do countries give credit for taxes paid on foreign-source income? What types of risk are present in a diversified portfolio? Which type of risk remains after the portfolio has been diversified? What are the advantages and disadvantages of limiting a firm’s activities to exporting compared to producing abroad?
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