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A27) Yes

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A27) Yes. Fernandez (2002 and 2004, chap 18)⁶ shows that discounting expected EVAs provides the same value as discounting cash flows (as long as, from an accounting point of view, the increase in value of the Shareholders’ Equity equals the net income minus the dividends}. If E is the value of the shares and Evc is their book value, then:

E_o = Evc_o + VA (EVA; WACC), where EVA_t = NOPAT_t - (D_t-1 + Evc_t-1)WACC

The NOPAT (Net Operating Profit After Taxes) is the profit of the unleveraged company (the profit before interests and after taxes). The EVA depends mainly on two accounting parameters: the profit and the book value of equity and debt.’

A28. It is true: there are companies that accuse investors who perform credit sales of making their quotation fall. But the stock market is just a financial market and prices fall when there are more sales than purchases and vice versa. The investors who perform credit sales and the investors who sell 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 forcing the price up!

A29. Besides causing distortion (as it unequally affects all goods and services), inflation increases the uncertainty for companies and makes decision making a lot more difficult. On the other hand, it generates increases in the present value of the taxes which are to be paid’ and decreases the value of the shares.

A30. Yes. The WACC can only be constant when a constant debt is expected. If debt changes from one year to the next, the WACC also changes from one year to the next, according to the formula:

WACC_t = [E_t-1 Ke_t + D_t-1 Kd_t (1-T)] / [E_t-1 + D_t-1]