Question: BBVA utilized a rather innovative approach to dealing with both country and currency risk in their December 20, 2004, report on Petrobrs. Evaluate the methodology

BBVA utilized a rather innovative approach to dealing with both country and currency risk in their December 20, 2004, report on Petrobrás. Evaluate the methodology and assumptions used in this cost of capital calculation.

BBVA utilized a rather innovative approach to dealing with both

Cost of Capital Component U.S. 10-year risk-free rate (in $) Country risk premium (in $) Petrobrs premium "adjustment" Petrobrs risk-free rate (in $) Market risk premium (in S) Petrobrs beta (B) Cost of equity (in S) Projected 10-year currency 2003 Estimate 4.1 0% 6.00% 1.00% 9.10% 6.00% 2004 Estimate 4A0% 4.00% 1.00% 0.80 13.9096 2.50% 16.75% 5.50% 0.80 12.20% 2.50% 14.44% 553% devaluation Cost of equity (in R$) Petrobrs cost of debt after-tax (in R$) Long-term equity ratio (% of capital) Long-term debt ratio (% of capital) WACC (in R$) 69% 31% 13.30% 72% 28% 12.00%

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