ABSTRACT
A unifying concept in valuation and cost of capital analysis is the market-value balance sheet. The market-value balance sheet, like the traditional accounting balance sheet, maintains the equality of assets and liabilities but uses market values for the various components instead of book values. Three primary areas of corporate finance are examined: unlevered beta analysis, weighted average cost of capital and Modigliani and Miller’s equation and Miles and Ezzell’s adjusted discount rate. In perfect capital markets, the values of cash flows are said to be additive. The principle of value additivity holds that the present value of a cash flow stream is unaltered by combining or dividing its component parts. Viewing the firm’s decisions through its market-value balance sheet provides insight into the underlying valuation framework which is essential for consistent practical application. When the firm adds assets it is adding to the balance sheet and, conversely, when it sells off or abandons assets it subtracts from the balance sheet.
