Discuss the following questions

1. If someone knows how to forecast exchange it, they could be millionaire and could not lose time on forecasting exchange differences! There is no formula that could forecast exchange rates reasonably well. Actually, supposing aconstant exchange rate leads to bad forecasts, but is still better than supposing the exchange rate would follow the inflation differential or the interest rates differential.

2. Theoritjhically, the WACC can onlybe constant if a constant debt is expected. If the debt changes from one year to the next, the WACC changes as well. In order to value companies in which debt changes dramatically , the APV, (Adjusted Present Value) is easier and more intuitive . it is possible to use aconstant WACC ( the weighted average of the WACC of the different years) when debt changes , but it is anumber that does not have anything to do with the WACC of the differentin aparticular year.

3. The great majority of analysts admit that it is very difficult to realize projections of flows of young companies with uncertain futures. But Fernandez(2004, chap 9)shows that we can predict afuture year in which the company could already be consolidated.; that is, starting from aparticular year the company should have moderate growth. The capitalization that year should bne todays capitalization revaluated at the required return . if that capitalization looks reasonable, then todays quotation is also reasonable. But if it looks exegerrated then the company today is overvalued. A similar method is to calculate the flows necessary to justify future capitalization and to weight its magnitude.

4. The results we get by discounting the equity cash flow and the free cash flow are identical ( otherwise, one or both of the valuations are incorrect) .personally, I prefer discounting equty cash flows ( I find the flow and the discount rate more intuitive) . I also like to compliment this valuation with the APV.

5. Yes. Fernandez (2002 and 2004, chap 18)6 show sthat the discounting expected EVASprovides the same value as discounting cash flows ( as long as , from accounting point of view , the increase in value of the shareholders'equity equals thenet income minus the dividends). If E is the value of the sharesand Evc is their book value, then:

E0=Evc0+VA (EVA+WACC), where EVAt=NOPATt-1 (Dt+Evct-1) WACC

TheNOPAT ( Net operating profit after taxes ). The EVA depends mainly on two accounting parameters : the profit and the book value of equity and debt.7

6. it is true there are companioes who accuse investors who perform credit sales of making their quotation fall. But the stock market is just afinancial market and prices fall when there are more sales than purchase and vice versa . the investors who perform credit sales and the investors who sale their shares - as well as those who do not buy - are all equally responsible for the fall in prices. Why not accuse the investors who do not buy as well? If this position were consistent , they should also accuse the investors who chose to buy of forcingthe price up !

7. besides causing distortion (as it unequally affects all goods and services), inflation increases the uncertainity for companies and makes decision a lot more difficult. On the other hand, it generates increases in the present value of the taxes which are to be paidand decreases the value of the shares.

8. Yes. The WACC can only be constant when aconstant debt is expected . if the debt changes from one year to the next , the WACC also changes from one year to the next , accordingto the formula : WACC t={Et-1Ket+Dt-1 kdt(1-T) /(Et-1 +Dt-1)

ke is the required return to equity , kd is the cost of debt and T is the effective rate of income tax . Et-1 and Dt-1are the values of the shares and the debt which are obtained in the valuation . this formula for WACC implies that the value of the debt coincides with its book value.

9. The relationship net income and the available flow to shareholdersin a year is the following. CFac=BF0- D+ Evc, where NOF is the increase in working capitl requirements, AFN, the increase in the net fixed assets , D, The increase in financial debtand Evc * the increase in shareholders' Euitywhich is not due to profits (reserves, conversion of convertibles...)

10. Yes. During the period 1998- 2007, only 30 of the 935 mutual funds with over 10 years of history obtained a higher return than the benchmarkused; and just two of them obtained ahigher return than the overall index of the Madrid stock exchange. D1998-2007 and 1992 -2007, the average return on mutual funds were lowerthan the returns on the state bonds( at any term considered) . During the past 10 years, the average returns of the funds was lower than inflation.Despite these results , at 31st December 2007,8,264 ,240 shareholders had 238.7 euros billion invested in the 2907 existing investment funds.

11. The expression Ke = DIV (1+g) / p +g comes from the Gordon and Shapiro formula to value shares: p= DIV(1+g) /(ke-g ). In these formulas , P and DIV are known and ke and g are unknown. Some people take as g ( expected groth of dividends) the average of expectation of analysts, and afterwardsthey calculate ke (ke calculated ibn such way is usually called implicit). But ke calculated in this way is just oneof several which can be calculated .the formula allows us to obtain pairs (ke, g) which satisfy the equation.

12. It is not possible to talk of "the" market premium for spain. A rtisk premium is an increamental return an investor demands from shares, above the return on risk free bonds. There is amarket risk premium of each investor , but it is not possible to talk about a market risk premium of the market. In order to be able to talk about amarket risk premium of the market it could be necessary that all investors had the same one. On the other hand, the "risk premium" is used to define four different concepts :the increamental required return above fixed-income , the differential historical return , the expectation of differential return and the implicit market risk premium.

13. No. value creation in aperiod is the difference between the return to shareholder' and the required return multiplied by the capitalization at the begging of the period.