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Chapter 15
Chapter 15
Chapter 15
Capital Cost Components Risk Free Rate Sovereign Risk Equity Risk Premium Market Cost of Equity Beta (relevered) Cost of equity Cost of Debt Tax rate Cost of debt, after-tax Debt/Capital ratio Equity/Capital ratio WACC (calculated) WACC (I-Bank report)
This approach applies the sovereign risk premium to the cost of equity for both companies, but not to their cost of debt. Since the comparison is for two oil companies from two different countries, and the same risk free rate is used for both, it is implied, though not stated, that the WACC calculation is based in US dollars.
Source: "Petrobras: A Diamond in the Rough," JP Morgan, Latin American Equity Research, June 18, 2004, p. 24.