How Inflation Destroys Value

Pablo Fernandez Ch29 How Inflation destroys value IESE Business School, University of Navarra

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How Inflation destroys Value

Pablo Fernandez

Professor of Finance. IESE Business School, University of Navarra Camino del Cerro del Aguila 3. 28023 Madrid, Spain

e-mail: [email protected] January 13, 2015

The return on investments depends on the effects of inflation. To analyze the effect of inflation, we shall use a case study of two companies engaging in the same business and in identical market conditions but in two countries with very different inflation rates. The problem of inflation and its consequences is expressed very clearly. And its solution is very simple. When inflation is high, company earnings are artificially high (i.e., not caused by an improvement in the companys situation), which means that the tax paid is higher than if there was no inflation. Consequently, investments real return is less.

1. Campa Spain and Campa Argentina 2. Analysis of the differences between Campa Spain and Campa Argentina 3. Differences between Campa Spain and Campa Argentina as a function of inflation 4. Adjustments to correct for the effects of inflation 5. Inflation 1970-2012: Spain, Argentina, Peru, Chile and Mexico Exhibit 1. Credit rating histories of Argentina and Spain

Tables and figures are available in excel format with all calculations in: http://web.iese.edu/PabloFernandez/Book_VaCS/valuation%20CaCS.html

A version in Spanish may be downloaded in: http://ssrn.com/abstract=1125625


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1. Campa Spain and Campa Argentina Victor Campa wondered where part of the money from his businesses in Argentina went. His brother Alberto was engaging in a business that was identical to his business in Spain but Albertos dividends were much higher. Alberto Campa sold undecipherable wave radio transmitters through Campa Spain. The Campa brothers had developed a device (with the appearance of a black box) in which they placed a normal radio transmitter. Over a one-year period, the transmitter acquired certain special magnetic properties so that the waves it emitted were impossible to decipher. They kept the black box at home and the patent gave them worldwide protection. Complete manufacture of the black box - Campa Spains only fixed asset - cost 20 million euros. The box operated for 5 years, at the end of which it could no longer be used and it had no residual value. The business was very simple. On 31 December 2007, they bought a normal transmitter for 80 million euros in cash, put it in the black box and sold it to the Government (converted into an undecipherable wave transmitter) on 31 December 2008, also in cash, for 104 million euros. On that same day, they bought another normal transmitter, put it into the black box and sold it on 31 December 2009. This process was continued until 31 December 2012 when the last transmitter would be sold and the black box would be unusable. The tax authorities allowed the black box to be depreciated over a 5-year period at a rate of 4 million euros per year. Alberto Campa founded Campa Spain on 31 December 2007, with a share capital of 100 million euros, which he used to pay for the black box (20 million) and buy the first transmitter (80 million). During those years, there was no inflation in Spain so Campa Spain obtained the same profit during each of the 5 years the black box lasted: 14 million euros (sales 104, cost of sales 80, depreciation 4, tax on earnings 6, net income 14). The tax rate was 30% and tax was paid on 31 December of the year in which it was generated. Alberto Campa received 14 million euros each year as dividends and another 4 million euros as an advance on account. A well-known consultant calculated the cash flow generated by Campa Spain for its owner: investment of 100 million euros in 2007, payback of 18 million euros in 2008, 2009, 2010 and 2011, and 98 million euros in 2012. He also estimated the investments net present value (NPV) at 0% (there was no inflation in Spain) at 70 million euros and the internal rate of return (IRR) at 15.04%. Victor Campa started operating in Argentina at the same time as his brother Alberto in Spain. On 31 December 2007, the euro-peso exchange rate was 1 euro = 1 peso. Victor formed Campa Argentina with an upfront investment of 100 million pesos. With this money, he paid for the black box (20 million) and bought the first transmitter (80 million). Annual inflation in Argentina was 25%. The transmitter selling and buying prices adjusted exactly to inflation. Victor had sold his transmitters for 130 million pesos in 2008, 162.5 million pesos in 2009, and so on. The transmitters had cost 80 million pesos in 2007; 100 million pesos in 2008; 125 million pesos in 2009, etc. Tax, whose rate in Argentina was 30%, as in Spain, was also paid on 31 December of the year on which it was generated and the black box was depreciated over 5 years at a rate of 4 million pesos a year. All conditions - except for inflation - were identical to those existing in Spain. Everything seemed to indicate that Campa Argentina should have the same return (after adjusting for inflation) as Campa Spain. However, the net income for 2008 was 32.2 million pesos (equivalent to 25.76 million euros), which was more than that obtained by Campa Spain. In spite of this, at the end of 2008, Victor only received 16.2 million pesos (equivalent to 12.96 million euros) in dividends, which is less than the amount received by Alberto. He could not receive more dividends because there was no more cash available. During the following years, Campa Argentinas net income was greater than that of Campa Spain, but Victor received a lower remuneration than his brother Alberto. Earnings for 2008 amounted to 32.2 million pesos (sales 130, cost of sales 80, depreciation 4, tax 13.8, and net income 32.2), but the cash flow was 16.2 million. The euro-peso exchange rate adjusted to the inflation differential (1 euro = 1 peso at the value in 2007; 1.25 pesos at the value in 2008; ... 3.0518 pesos at the value in 2012). Alarmed, Victor asked his brothers consultant for help. The consultant calculated Campa Argentinas cash flow: investment of 100 million pesos in 2007 and paybacks of 16.2, 19.95, 24.64, 30.50 and 281.96 in 2008, 2009, 2010, 2011 and 2012, respectively. The net present value (NPV) of the investment at 25% was 43.23 million pesos at the value in 2007 (equivalent to 43.23 million euros) and the internal rate of return (IRR) was 36.69%, but falling to 9.35% after adjusting for inflation (25%)1. Victor reasoned as follows: "the net present value of the cash flow generated by my company is worth 43.23 million pesos at the value in 2007 (equivalent to 43.23 million euros). The net present value of the cash flow

1 To adjust for inflation, the following expression is used: 1 + nominal IRR = (1+ adjusted IRR) (1+ inflation rate)


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generated by Albertos company is worth 70 million euros. We both do the same and generate the same wealth. Or my calculations are wrong or someone else is pocketing the 26.77 million euros difference (70 - 43.23)". The reader is asked to help Victor Campa find out the reason for this difference of 26.77 million euros between the two companies cash flows.

2. Analysis of the differences between Campa Spain and Campa Argentina We shall create two tables that shall give a clearer view of the two companies situation. Table 1 shows the income statements and balance sheets for Campa Spain after the year 2007. It will be seen that Alberto Campas remuneration, which is the equity cash flow, is equal to the free cash flow because the company has no debt. The investments IRR is 15.04%.

Table 1. Campa Spain. (Million euros) Income statement 2007 2008 2009 2010 2011 2012 SumSales 104 104 104 104 104 520Cost of sales 80 80 80 80 80 400Depreciation 4 4 4 4 4 20EBT 20 20 20 20 20 100Tax (30%) 6 6 6 6 6 30Net income 14 14 14 14 14 70

Remuneration of Alberto Campa (equity cash flow) Dividends 14 14 14 14 14 70Advance on account 4 4 4 4 -16 0Investment in the company -100 0 0 0 0 0 -100Liquidation of the company 0 0 0 0 100 100Total -100 18 18 18 18 98 70

Balance sheet Cash 0 0 0 0 0 0 Advance on account 4 8 12 16 0 Stocks 80 80 80 80 80 0 Net fixed assets 20 16 12 8 4 0 Assets 100 100 100 100 100 0 Capital 100 100 100 100 100 100 Reserves 0 0 0 0 -100 Liabilities 100 100 100 100 100 0

Free cash flow Net income 0 14 14 14 14 14 70 + Depreciation 4 4 4 4 4 20 - Investments in working capital requirements

-80 0 0 0 0 80 0

- Investments in fixed assets -20 0 0 0 0 0 -20Total -100 18 18 18 18 98 70

IRR of the free cash flow = 15.04%

The balance sheets, income statements and cash flows of Campa Argentina are shown in Table 2. It is seen again that Victor Campas remuneration (the equity cash flow) is identical to the free cash flow because this company has no debt either. The investments IRR is 36.69%. To compare it with the IRR obtained by his brother in Spain (where zero inflation is assumed), we perform the following operation:

[(1 + 0.3669) /1.25] - 1 = 9.35%


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Table 2. Campa Argentina. (Million pesos) Campa NPV Spain

Income statement 2007 2008 2009 2010 2011 2012 Suma 25% SumSales 130 162.5 203.13 253.91 317.38 1066.91 520.00 520Cost of sales 80 100 125 156.25 195.31 656.56 320.00 400Depreciation 4 4 4 4 4 20 10.76 20EBT 46 58.5 74.13 93.66 118.07 390.35 189.24 100Tax (30%) 13.8 17.55 22.24 28.10 35.42 117.11 56.77 30Net income 32.2 40.95 51.89 65.56 82.65 273.25 132.47 70

Remuneration of Victor Campa (equity cash flow) Dividends 16.2 19.95 24.64 30.5 181.96 273.25 110.46 70Investment -100 0 0 0 0 0 0 -100.00 -100Liquidation of the company

0 0 0 0 100 100 32.77 100

Total -100 16.2 19.95 24.64 30.5 281.96 373.3 43.23 70

Balance sheet Cash 0 0 0 0 0 0 Stocks 80 100 125 156.25 195.31 0 Net fixed assets 20 16 12 8 4 0 Assets 100 116 137 164.25 199.31 0 Capital 100 100 100 100 100 100 Reserves 16 37 64.25 99.31 -100 Liabilities 100 116 137 164.25 199.31 0

Free cash flow Net income 0 32.2 40.95 51.89 65.56 82.65 273.25 132.47 70 + Depreciation 4 4 4 4 4 20 10.76 20 - working capital requirements

-80 -20 -25 -31.25 -39.0625 195.313 80 0.00 0

- fixed assets -20 0 0.00 -20Total -100 16.2 19.95 24.64 30.4975 281.963 373.25 143.23 70

IRR = 36.69% IRR adjusted for inflation = 9.35% [ (1.3669/1.25) - 1 = 9.35% ]

Table 3. Cash flows and IRR of Campa Spain and Campa Argentina

2007 2008 2009 2010 2011 2012 IRR Campa Spain (million euros) -100 18 18 18 18 98 15.04% Campa Argentina (million pesos)

Current pesos -100 16.2 19.95 24.64 30.5 281.96 36.69% Constant pesos -100 12.96 12.77 12.61 12.49 92.39 9.35%

The inflation adjustment operation we have just performed is equivalent to calculating Campa Argentinas IRR considering real (or constant) pesos, that is, pesos discounted for the effect of inflation and not current pesos. Table 3 shows the cash flows and IRRs of Campa Spain and Campa Argentina (in current pesos and constant pesos). This table shows that, in real terms (after discounting the effect of inflation), Campa Spain has a return of 15.04%, while Campa Argentina has a lower return of only 9.35%. What happens to the cash flows? Upon calculating the cash flows NPV at the inflation rate, in Spain this gives 70 and only 43.23 in Argentina. Where has the 26.77 million pesos difference gone? If we take a close look at Table 2 and analyze the different accounts included in the cash flow, we can see the difference between the NPVs of the tax paid by the two companies during the last five years. Thus, in Spain at 0%, we obtain 30 million, while in Campa Argentina the NPV of the tax payment at 25% is 56.77 million.


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56.77 - 30 = 26.77 million We have found the difference: Campa Argentina has paid 26.77 million more in tax than Campa Spain, while both companies perform the same activity and in identical conditions, except for the inflation rate. Hence our result 56.77-30=26.77. The project in Argentina is less profitable than in Spain because, as a result of inflation, a large part of the companys business is eaten up by tax. The project in Argentina is less profitable than in Spain because, as a result of inflation, earnings before tax (EBT), which is the basis on which the tax is calculated, is artificially increased. This means that the amount of tax that must be paid is greater, taking away large part of the companys revenues. Table 4 shows the valuation of Campa Spain and Campa Argentina with different rates. If the required return to equity in Spain were to be 10%, the required return to equity in Argentina2 should be 37.5% (0.375 = 1.1 x 1.25 -1). Thus, the present value of the sum of equity cash flow and tax is identical: 40.7 million (euros and pesos). In this situation, the value of Campa Spains shares would be 17.9 million euros and the value of Campa Argentinas shares would be -2.3 million pesos. Figure 3 shows the present value of the equity cash flows for different discount rates.

Table 4. Differences in the valuation of Campa Spain and Campa Argentina with different

discount rates. KeARGENTINA = (1+ KeSPAIN ) x 1.25 - 1 Shareholder + Taxes Shareholder

KeSPAIN KeARGENTINA NPVSPAIN NPVARGENTINA NPVSPAIN NPVARGENTINA Difference (million euros) (million pesos) (million euros) (million pesos)

0.0% 25.0% 100.0 100.0 70.0 43.2 26.81.0% 26.3% 92.6 92.6 63.5 37.5 26.02.0% 27.5% 85.6 85.6 57.3 32.1 25.23.0% 28.8% 78.9 78.9 51.4 27.0 24.54.0% 30.0% 72.6 72.6 45.9 22.1 23.85.0% 31.3% 66.6 66.6 40.6 17.5 23.110.0% 37.5% 40.7 40.7 17.9 -2.3 20.215.0% 43.8% 20.2 20.2 0.1 -17.7 17.816.0% 45.0% 16.7 16.7 -3.0 -20.4 17.420.0% 50.0% 3.9 3.9 -14.0 -29.9 15.9

Figure 1. Net present value of the cash flows of Campa Spain and Campa Argentina.

-20-10

010203040506070

0% 5% 10% 15% 20% 25%Ke Spain

Million euros (pesos)

NPV Campa Argentina NPV Campa Spain

2 Assuming that the only risk difference affecting business in both countries is caused by inflation.


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3. Differences between Campa Spain and Campa Argentina as a function of inflation

Figure 2. IRR and IRR adjusted for inflation of Campa Argentina as a function of the inflation in Argentina

0%

10%

20%

30%

40%

50%

60%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%Inflation Argentina

IRR ArgentinaIRR ajusted for inflacin

Figure 3. Difference of NPVs of the cash flows for the shareholders of Campa Spain and Campa Argentina. The NPVs are calculated using the inflation rate as discount rate.

0

10

20

30

40

50

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%Inflation Argentina

Difference ( millions) of NPVs of Spain (70) and Argentina using the inflation as discount rate

4. Adjustments to correct for the effects of inflation Table 5 shows how the disadvantage of Campa Argentina with respect to Campa Spain disappears after reappraisal (adjustment for inflation) of fixed assets and stocks. Looking at Tables 5 and 6, we can se that once the assets have been restated and the necessary adjustments for inflation have been made, earnings (which were artificially increased by inflation) decrease but the cash flow increases because tax is reduced. Thus, the net present value of each companys cash flows, discounted at the corresponding inflation rate, is the same and, likewise, the internal rates of return of the project in Spain and in Argentina is equal: the two investments return is the same. If the countrys current legislation does not allow assets to be restated, tax will take away a significant part of the companys value, and this part will be higher at higher inflation rates.


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Table 5. Campa Argentina with restatement. (Million pesos) Campa NPV Spain

Income statement 2007 2008 2009 2010 2011 2012 Suma 25% SumSales 130 162.5 203.13 253.91 317.38 1066.91 520 520Cost of sales 80 100 125 156.25 195.31 656.56 320 400Reappraisal of stocks (1) 20 25 31.25 39.06 48.83 164.14 80 0Depreciation 4 4 4 4 4 20 10.76 20Depreciation due to reappraisal of fixed assets (2)

1 2.25 3.81 5.77 8.21 21.04 9.24

EBT 25 31.25 39.06 48.83 61.04 205.18 100 100Tax (30%) 7.5 9.37 11.72 14.65 18.31 61.55 30 30Net income 17.5 21.88 27.34 34.18 42.72 143.62 70 70

Remuneration of Victor Campa Dividends 17.5 21.88 27.34 34.18 42.72 143.62 70 70Advance on account 5 6.25 7.81 9.77 -28.83 0 6.55 0Investment -100 0 0 0 0 0 -100 -100 -100Liquidation of the company 0 0 0 0 285.18 285.18 93.45 100Total -100 22.5 28.13 35.15 43.95 299.07 328.8 70 70

Balance sheet Cash 0 0 0 0 0 0 Advance on account. Victor Campa 5 11.25 19.06 28.83 0 Stocks 80 100 125 156.25 195.31 0 Gross fixed assets 20 20 20 20 20 20 Reappraisal gross fixed assets 1 3.25 7.06 12.83 21.04 Accum. dep initial assets 4 8 12 16 20 Accum. dep reappraised assets 1 3.25 7.06 12.83 21.04 Net fixed assets 20 16 12 8 4 0 Total assets 100 121 148.25 183.31 228.14 0 Capital 100 100 100 100 100 100 Reserves (retained earnings) 0 0 0 0 -100 Reserves (reappraisal stocks) 20 45 76.25 115.31 0 Reserves (reappraisal fixed assets) 1 3.25 7.06 12.83 0 Total liabilities 100 121 148.25 183.31 228.14 0

Free cash flow Net income 0 17.5 21.88 27.34 34.18 42.72 143.62 70 70 + Depreciation 5 6.25 7.81 9.77 12.21 41.04 20 20 - WCR -80 -20 -25 -31.25 -39.06 195.31 0 -80 0 + Reappraisal stocks 20 25 31.25 39.06 48.83 164.14 80 - Investments in fixed assets -20 -20 -20 -20Total -100 22.5 28.13 35.16 43.95 299.07 328.80 70 70(1) Reappraisal of stocks in year n = 80 (1.25n - 1.25n-1 ) (2) Depreciation due to reappraisal of fixed assets in year n = 4 (1.25n - 1)

Table 6 summarizes the cash flows of Campa Spain and Campa Argentina.

Table 6. Cash flows and IRR of Campa Spain and Campa Argentina (in current pesos and constant pesos) without and with restatement.

2007 2008 2009 2010 2011 2012 IRR 1 Campa Spain (million euros) -100 18 18 18 18 98 15.04% Campa Argentina without restatement (without adjustments) (million pesos) 2 current pesos -100 16.20 19.95 24.64 30.50 281.96 36.69%3 constant pesos -100 12.96 12.77 12.61 12.49 92.39 9.35% Campa Argentina with restatement (with adjustments) (million pesos) 4 current pesos -100 22.50 28.13 35.16 43.95 299.07 43.79%5 constant pesos -100 18.00 18.00 18.00 18.00 98.00 15.04%


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5. Inflation 1970-2012: Spain, Argentina, Peru, Chile and Mexico

Table 7 shows the evolution of inflation in Spain, Argentina, Peru, Chile and Mexico from 1970 to 2012. Note that Argentina had 2 years of 4-digit inflation, 12 years of 3-digit inflation, 9 years of 2-digit inflation, and only 8 years of 1-digit inflation. Spain had 19 years of 1-digit inflation and 12 years of 2-digit inflation.

Table 7. Annual inflation in Spain, Argentina, Peru, Chile and Mexico Source: Datastream, IN Argentina, IN Chile

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984Mexico 5% 5% 5% 12% 24% 15% 16% 29% 18% 18% 26% 28% 57% 104% 66%Spain 6% 8% 8% 11% 16% 17% 18% 24% 20% 16% 16% 15% 14% 12% 11%Argentina 13% 35% 58% 62% 24% 171% 487% 192% 177% 161% 104% 102% 159% 324% 585%Peru 5% 7% 7% 10% 17% 24% 33% 39% 57% 68% 59% 76% 64% 109% 112%Chile 35% 20% 78% 353% 505% 375% 212% 92% 40% 33% 35% 20% 10% 27% 20%

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999Mexico 58% 84% 129% 125% 20% 27% 23% 16% 10% 7% 35% 35% 21% 16% 17%Spain 9% 9% 5% 5% 7% 7% 6% 6% 5% 5% 5% 4% 2% 2% 2%Argentina 780% 116% 126% 320% 2297% 7029% 254% 27% 11% 4% 3% 0% 1% 1% -1%Peru 161% 85% 84% 560% 3931% 5431% 2373% 78% 49% 24% 11% 12% 9% 7% 3%Chile 31% 19% 20% 15% 17% 26% 22% 15% 13% 11% 8% 7% 6% 5% 3%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mexico 10% 6% 5% 5% 5% 4% 4% 4% 5% 5% 4% 3% 4% Spain 3% 4% 3% 3% 3% 3% 4% 3% 4% 0% 2% 3% 2% Argentina -1% -1% 26% 15% 4% 10% 11% 9% 9% 6% 10% 10% 10% Peru 4% 2% 0% 2% 4% 2% 2% 2% 6% 3% 2% 3% 4% Chile 4% 4% 2% 3% 1% 3% 3% 4% 9% 0% 1% 3% 3%

Figure 4. Cummulative inflation. 1970 = 1.

110

1001000

10000100000

100000010000000

1000000001E+091E+101E+111E+121E+13

1970 1975 1980 1985 1990 1995 2000 2005 2010

MexicoSpainArgentinaPeruChile

Exhibit 1 shows the credit rating histories of Argentina and Spain.


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Exhibit 1. Credit rating histories of Argentina and Spain

S&P Source: www.standardandpoors.com/RatingsActions/RatingsLists/Sovereigns/index.html Long-Term/Outlook/Short Term

Date Local Currency Rating Foreign Currency Rating Argentina July, 2011 B/Stable/B B/Stable/B Sept., 2010 B/Stable/B B/Stable/B April., 2008 B+/Negative/B B+/Negative/B Nov., 2008 B-/Stable/C B-/Stable/C Aug., 2008 B/Stable/B B/Stable/B June, 2007 B+/Stable/B B+/Stable/B Oct., 2008 B-/Stable/C B-/Stable/C Nov., 2006 B+/Stable/B B+/Stable/B March, 2006 B/Stable/B B/Stable/B Nov., 2005 B-/Stable/C B-/Stable/C June, 2005 B-/Stable/C B-/Stable/C Nov., 2005 B-/Stable/C B-/Stable/C Feb., 2002 SD/NM/SD SD/NM/SD Nov., 2001 SD/NM/C SD/NM/C Oct., 2001 CC/ CC/Negative/C Oct., 2001 CCC+/Negative/C CCC+/Negative/C July 12, 2001 B-/Negative/C B-/Negative/C June 6, 2001 B/Negative/C B/Negative/C May 8, 2001 B/CW Neg./C B/CW Neg./C March 26, 2001 B+/CW Neg./B B+/CW Neg./B March 19, 2001 BB/CW Neg./B BB-/CW Neg./B Nov. 14, 2000 BB/Stable/B BB-/Stable/B Oct. 31, 2000 BBB-/CW-Neg./A-3 BB/CW-Neg./B Feb. 10, 2000 BBB-/Stable/A-3 BB/Stable/B July 22, 1999 BBB-/Negative/A-3 BB/Negative/B April 2, 1997 BBB-/Stable/A-3 BB/Stable/B March 8, 1995 BBB-/Stable/A-3 BB-/Stable/B Sept. 1, 1994 BBB-/Positive/A-3 BB-/Postive/B Aug. 22, 1994 /Positive/A-3 BB-/Positive/B Feb. 4, 1994 BB-/Positive/ Aug. 25, 1993 BB-/Stable/

Spain Oct, 2012 BB/Negative/B BBB- Abril, 2012 BB/Negative/B BBB+ Dec. , 2011 AA-/Watch Neg/A-1+/Watch Neg AA-/Watch Neg/A-1+/Watch Neg Oct, 2011 AA-/Negative/A-1+ AA-/Negative/A-1+ April, 2010 AA/Negative/A-1+ AA/Negative/A-1+ Dec., 2009 AA+/Negative/A-1+ AA+/Negative/A-1+ Jan., 2009 AA+/Stable/A-1+ AA+/Stable/A-1+ Jan., 2009 AAA/Watch Neg/A-1+ AAA/Watch Neg/A-1+ Nov., 2005 AAA/Stable/A-1+ AAA/Stable/A-1+ Dec., 2004 AAA/Stable/A-1+ AAA/Stable/A-1+ July, 2003 AA+/Positive/A-1+ AA+/Positive/A-1+ March 31, 1999 AA+/Stable/A-1+ AA+/Stable/A-1+ May. 6, 1998 AA/Positive/A-1+ AA/Positive/A-1+ Feb. 6, 1996 AAA/Stable/A-1+ AA/Stable/A-1+ Dec. 11, 1992 AAA/Stable/A-1+ AA/Positive/A-1+ June 26, 1989 AA/Positive/A-1+ Aug. 1, 1988 AA//A-1+ May 25, 1987 Strong/A-1+ Jan. 3, 1984 //A-1+


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ARGENTINA

Long-Term Debt Short-Term Debt Foreign Currency Local Currency Foreign Currency Local Currency Date Rating Date Rating Date Rating Date Rating Moody's 25/07/2006 Ba2 25/07/2006 Ba2 02/10/1997 NP Moody's 29/06/2005 B3 20/08/2003 B3 28/01/1997 NP Moody's 20/08/2003 Caa1 20/12/2001 Ca Moody's 20/12/2001 Ca 03/12/2001 Caa3 Moody's 03/12/2001 Caa3 12/10/2001 Caa3 Moody's 12/10/2001 Caa3 26/07/2001 Caa1 Moody's 26/07/2001 Caa1 13/07/2001 B3 Moody's 13/07/2001 B3 28/03/2001 B2 Moody's 28/03/2001 B2 06/10/1999 B1 Moody's 06/10/1999 B1 02/10/1997 Ba3 Moody's 02/10/1997 Ba3 28/01/1997 B1 Moody's 13/07/1992 B1 Moody's 26/05/1989 B3 Moody's 04/12/1987 B2 Moody's 18/11/1986 Ba3 Fitch 27/11/2012 C 08/05/2012 B 27/11/2012 B- 27/11/2012 B- Fitch 30/10/2012 B 01/09/2011 BB- 30/10/2012 B 30/10/2012 B Fitch 08/05/2012 B 22/07/2011 B 08/05/2012 B 08/05/2012 B Fitch 01/09/2011 BB- 12/07/2010 B 01/09/2011 B Fitch 22/07/2011 B 13/08/2009 BB- 22/07/2011 B Fitch 12/07/2010 B 18/12/2008 B- 12/07/2010 B Fitch 13/08/2009 BB- 03/07/2008 BB 13/08/2009 B Fitch 18/12/2008 RD 01/05/2007 BB- 18/12/2008 B Fitch 03/07/2008 BB 01/08/2006 B 03/07/2008 B Fitch 01/05/2007 BB- 24/05/2006 BB- 01/05/2007 B Fitch 01/08/2006 RD 14/12/2005 B- 01/08/2006 B Fitch 24/05/2006 BB- 03/06/2005 B- 24/05/2006 B Fitch 14/12/2005 RD 14/01/2005 B- 14/12/2005 B Fitch 03/06/2005 DDD 17/06/2004 B- 03/06/2005 B Fitch 14/01/2005 D 26/04/2004 B- 14/01/2005 D Fitch 17/06/2004 DDD 04/01/2002 C 17/06/2004 D Fitch 26/04/2004 DDD 03/12/2001 DDD 26/04/2004 C Fitch 04/01/2002 DDD 06/11/2001 C 04/01/2002 C Fitch 03/12/2001 DDD 02/11/2001 CC 03/12/2001 D Fitch 06/11/2001 C 12/10/2001 CCC- 06/11/2001 C Fitch 02/11/2001 CC 11/07/2001 B- 02/11/2001 C Fitch 12/10/2001 CCC- 28/03/2001 B+ 12/10/2001 C Fitch 11/07/2001 B- 20/03/2001 BB 11/07/2001 B Fitch 28/03/2001 B+ 21/09/2000 BB+ 28/03/2001 B Fitch 20/03/2001 BB- 03/12/1997 BB+ 20/03/2001 B Fitch 21/09/2000 BB 21/09/2000 B Fitch 03/12/1997 BB 03/12/1997 B Fitch 28/05/1997 BB 28/05/1997 B


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SPAIN Long-Term Debt Short-Term Debt Foreign Currency Local Currency Foreign Currency Local Currency Date Rating Date Rating Date Rating Date Rating Moody's 16/10/2012 Baa3 16/10/2012 Baa3 16/10/2012 (P)P-3 Moody's 13/06/2012 Baa3 13/06/2012 Baa3 13/06/2012 (P)P-3 Moody's 13/02/2012 A3 13/02/2012 A3 13/02/2012 (P)P-2 Moody's 18/10/2011 A1 18/10/2011 A1 28/08/2010 (P)P-1 Moody's 10/03/2011 Aa2 10/03/2011 Aa2 21/01/2000 P-1 Moody's 30/09/2010 Aa1 30/09/2010 Aa1 Moody's 13/12/2001 Aaa 13/12/2001 Aaa Moody's 03/02/1988 Aa2 31/01/1997 Aa2

S&P 10/10/2012 BBB- 10/10/2012 BBB- 10/10/2012 A-3 10/10/2012 A-3 S&P 26/04/2012 BBB+ 26/04/2012 BBB+ 26/04/2012 A-2 26/04/2012 A-2 S&P 13/01/2012 A 13/01/2012 A 13/01/2012 A-1 13/01/2012 A-1 S&P 13/10/2011 AA- 13/10/2011 AA- 03/01/1984 A-1+ 03/08/1995 A-1+ S&P 28/04/2010 AA 28/04/2010 AA

Fitch 08/02/2013 F2 28/06/2012 BBB 08/02/2013 BBB 08/02/2013 AAA Fitch 14/11/2012 F2 07/06/2012 BBB 14/11/2012 BBB 14/11/2012 AAA Fitch 04/10/2012 F2 21/02/2012 A 04/10/2012 BBB 04/10/2012 AAA Fitch 28/06/2012 BBB 27/01/2012 A 28/06/2012 F2 28/06/2012 AAA Fitch 07/06/2012 BBB 16/12/2011 AA- 07/06/2012 F2 Fitch 21/02/2012 A 18/11/2011 AA- 21/02/2012 F1 Fitch 27/01/2012 A 07/10/2011 AA- 27/01/2012 F1 Fitch 16/12/2011 AA- 04/03/2011 AA+ 16/12/2011 F1+ Fitch 18/11/2011 AA- 28/05/2010 AA+ 18/11/2011 F1+ Fitch 07/10/2011 AA- 10/12/2003 AAA 07/10/2011 F1+ Fitch 04/03/2011 AA+ 21/09/2000 AA+ 04/03/2011 F1+ Fitch 28/05/2010 AA+ 01/09/1999 AA+ 28/05/2010 F1+ Fitch 10/12/2003 AAA 14/07/1998 AA 10/12/2003 F1+ Fitch 21/09/2000 AA+ 26/10/1995 AAA 21/09/2000 F1+ Fitch 01/09/1999 AA+ 01/09/1999 F1+ Fitch 14/07/1998 AA 14/07/1998 F1+ Fitch 26/10/1995 AA 26/10/1995 F1+ Fitch 10/08/1994 AA

The reader interested in a deeper analysis of the effect of inflation on investment can see Baldwin, C. Y. and R. S. Ruback (1986), Inflation, Uncertainty and Investment, Journal of Finance, Vol. XLI, No. 3 (July), pages 657-669.

Questions Why Campa Argentina is less profitable than Campa Spain? Who benefits from high inflation? How do you interpret table 3 and figure 1? What figures 2 and 3 do tell us? How the bad effects of inflation for investrors can be eliminated? Please define: Return Real return Please define and differentiate: Internal rate of return. Real internal rate of return

How Inflation Destroys Value

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