Suppose there is a 30 percent chance that the Argentinian government will nationalize the project...
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Suppose there is a 30 percent chance that the Argentinian government will nationalize the project before the first year's cash flows arrive, and a 15 percent chance it will do so every year for the two years after that (if it was not nationalized previously). Assume that the probability of nationalization falls to zero after 3 years. Petrobras will get nothing if the project is nationalized. Nationalization is likely to take place when the whole region is in turmoil. Taking nationalization into account, the Brazilian government will demand a WACC of 150 basis points over the WACC 7.6%. Your colleague tells you that Argentinian sovereign spreads (Argentinian dollar bond yields minus US dollar bond yields) will go up to 6000 basis points. What is the enterprise value now compared to before?
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