Pablo Fernandez. PhD BusEc (Finance) Harvard U.

ChV 23 How Inflation destroys value: taxes

IESE Business School, University of Navarra

How Inflation destroys Value: Taxes

Pablo Fernandez
Professor of Finance. IESE Business School, University of Navarra
Camino del Cerro del Aguila 3. 28023 Madrid, Spain
e-mail: fernandezpa@iese.edu
Previous versions: 1996, 2002, 08, 13, 14, 15, 16, 17 May 24, 2019

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. The solution is very simple.
When inflation is high, company earnings are artificially high (i.e., not caused by an improvement in the
company’s 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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Pablo Fernandez. PhD BusEc (Finance) Harvard U. ChV 23 How Inflation destroys value: taxes
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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 Alberto’s 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 Spain’s 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 investment’s 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 Argentina’s 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 brother’s consultant for help. The consultant calculated Campa Argentina’s 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
generated by Alberto’s 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)".

1 To adjust for inflation, the following expression is used:

1 + nominal IRR = (1+ adjusted IRR) (1+ inflation rate)
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Pablo Fernandez. PhD BusEc (Finance) Harvard U. ChV 23 How Inflation destroys value: taxes
IESE Business School, University of Navarra

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 Campa’s
remuneration, which is the equity cash flow, is equal to the free cash flow because the company has no debt. The
investment’s IRR is 15.04%.

Table 1. Campa Spain. (Million euros)

Income statement 2007 2008 2009 2010 2011 2012 Sum
Sales 104 104 104 104 104 520
Cost of sales 80 80 80 80 80 400
Depreciation 4 4 4 4 4 20
EBT 20 20 20 20 20 100
Tax (30%) 6 6 6 6 6 30
Net income 14 14 14 14 14 70

Remuneration of Alberto Campa (equity cash flow)

Dividends 14 14 14 14 14 70
Advance on account 4 4 4 4 -16 0
Investment in the company -100 0 0 0 0 0 -100
Liquidation of the company 0 0 0 0 100 100
Total -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 -80 0 0 0 0 80 0
capital requirements
- Investments in fixed assets -20 0 0 0 0 0 -20
Total -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 Campa’s remuneration (the equity cash flow) is identical to the free cash flow because this
company has no debt either. The investment’s 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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Pablo Fernandez. PhD BusEc (Finance) Harvard U. ChV 23 How Inflation destroys value: taxes
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Table 2. Campa Argentina. (Million pesos)

Campa
NPV Spain
Income statement 2007 2008 2009 2010 2011 2012 Suma 25% Sum
Sales 130 162.5 203.13 253.91 317.38 1066.91 520.00 520
Cost of sales 80 100 125 156.25 195.31 656.56 320.00 400
Depreciation 4 4 4 4 4 20 10.76 20
EBT 46 58.5 74.13 93.66 118.07 390.35 189.24 100
Tax (30%) 13.8 17.55 22.24 28.10 35.42 117.11 56.77 30
Net 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 70
Investment -100 0 0 0 0 0 0 -100.00 -100
Liquidation of the 0 0 0 0 100 100 32.77 100
company
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 -80 -20 -25 -31.25 -39.0625 195.313 80 0.00 0
requirements
-  fixed assets -20 0 0.00 -20
Total -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 Argentina’s
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.
56.77 - 30 = 26.77 million

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Pablo Fernandez. PhD BusEc (Finance) Harvard U. ChV 23 How Inflation destroys value: taxes
IESE Business School, University of Navarra

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 company’s 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 company’s 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 Argentina 2 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 Spain’s shares would be 17.9 million euros and the value of Campa Argentina’s
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 26.8
1.0% 26.3% 92.6 92.6 63.5 37.5 26.0
2.0% 27.5% 85.6 85.6 57.3 32.1 25.2
3.0% 28.8% 78.9 78.9 51.4 27.0 24.5
4.0% 30.0% 72.6 72.6 45.9 22.1 23.8
5.0% 31.3% 66.6 66.6 40.6 17.5 23.1
10.0% 37.5% 40.7 40.7 17.9 -2.3 20.2
15.0% 43.8% 20.2 20.2 0.1 -17.7 17.8
16.0% 45.0% 16.7 16.7 -3.0 -20.4 17.4
20.0% 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.
70 NPV Camp a Argentina NPV Camp a Spain
60
50
40
Million
30
euros
(pesos) 20
10
0
-10
-20
0% 5% 10% 15% 20% 25%
Ke 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
60%
IRR Argentina
50% IRR ajusted for inflación
40%

30%

20%

10%

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

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.
50 Difference (€ millions) of NPVs of Spain (70) and Argentina using the inflation as
discount rate
40

30

20

10

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

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 company’s 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 country’s current legislation does not allow assets to be restated, tax will take away a significant part
of the company’s 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% Sum
Sales 130 162.5 203.13 253.91 317.38 1066.91 520 520
Cost of sales 80 100 125 156.25 195.31 656.56 320 400
Reappraisal of stocks (1) 20 25 31.25 39.06 48.83 164.14 80 0
Depreciation 4 4 4 4 4 20 10.76 20
Depreciation due to reappraisal of 1 2.25 3.81 5.77 8.21 21.04 9.24
fixed assets (2)
EBT 25 31.25 39.06 48.83 61.04 205.18 100 100
Tax (30%) 7.5 9.37 11.72 14.65 18.31 61.55 30 30
Net 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 70
Advance on account 5 6.25 7.81 9.77 -28.83 0 6.55 0
Investment -100 0 0 0 0 0 -100 -100 -100
Liquidation of the company 0 0 0 0 285.18 285.18 93.45 100
Total -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 -20
Total -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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Pablo Fernandez. PhD BusEc (Finance) Harvard U. ChV 23 How Inflation destroys value: taxes
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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 1984
Mexico 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 1999
Mexico 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. 1995=1

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

ChV23- 10

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Pablo Fernandez. PhD BusEc (Finance) Harvard U. ChV 23 How Inflation destroys value: taxes
IESE Business School, University of Navarra

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

ChV23- 11

Electronic copy available at: https://ssrn.com/abstract=2215796