Petrobras (A) & (B) Case Harvard Case Solution & Analysis

Petrobras (A) & (B) Case Study Analysis

Likewise, The total proceeds for 30 year bond is calculated for Petrobras by using the coupon payment which is calculated by multiplying the principle amount of 30 year bond with coupon rate. The bond proceeds is calculated by adding the principle amount and coupon payment and subtracting the legal cost & various fees and underwriter discount, hence resulted in total bond proceeds of $1,583,500,000. The calculations shows that the proceeds from 10 year bond is higher as compared to the proceeds from the 30 year bond because there are various risk that are attached with long term or 30 year bond, such as: liquidity risk, default risk and interest rate risk. As the yield to maturity (YTM) is equal to the coupon rate for 30 year bond, the bond would be sold at the par to the investors (Luehrman, 2016). The calculations of the total proceeds for 10 year bond and 30 year bond can be seen in Appendix C.

All-In Cost of the Bond under Assumptions

Taking into consideration the assumptions used in Question $03, the all in cost for 10 year bond is calculated by adding the legal cost & various cost amounted $2,000,000 and underwriter discount amounted $7,500,000, which resulted in total cost of $9,500,000. In the similar manner, the all in cost for 30 year bond is calculated by adding the legal cost & various cost amounted $2,000,000 and underwriter discount amounted $4,500,000 which resulted in total cost of $6,500,000. It is analysed that the all-in cost of the 10 year bond is higher as compared to the all-in cost of 30 year bond. It is because of the underwriter discount which is applied on the higher principle amount. The calculations can be seen in Appendix D.

Conclusion

Petrobras is a producer of oil, gas, and related products, headquartered in Rio de Janeiro, Brazil. It carries out crude oil and natural gas production along with refining and energy logistic activities on behalf of the Brazilian government. Petrobras was challenged with the final decision making regarding raising the amount of money through issuing bonds in order to finance the growth investment of the company. The expected costs (aka annual yield) that Petrobras will incur in the 10- and 30- year bonds would be $797116785 and $1345664086. Assuming 4.86 percent and 4.17 percent coupon rate for 10 year and 30 year bond, the cost would be $566316222.3and $1059001905 for 10 year and 30 year bond. The credit spread of 10 year bond is higher as compared to the credit spread of 30 year bond, hence demonstrating the higher risk associated with 10 year bond than 30 year bond due to which, the 10 year bondholder would require extra credit risk inherent in the bond.

 

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