This is an Economic Balance Sheet, which differs from a traditional accounting balance sheet by focusing on economic values rather than book values. It presents the firm’s total value from two perspectives:

  1. Resources/Assets Side (Sources of Value)
    • The value of the unlevered business operations ($13,000) represents the firm’s value if it had no debt and only included core operations.
    • The value of excess assets ($3,000) includes non-core assets such as cash reserves or other holdings not essential to operations.
    • The value of the unlevered firm ($16,000) is the sum of core business operations and excess assets.
    • The value created from financing ($3,800) represents the additional value generated by using leverage (PV of Tax Shield).
    • The total firm value ($19,800) is the sum of the unlevered firm value and financing benefits.
  2. Claims on Resources (Sources of Financing)
    • The firm’s total value is funded by debt ($5,304) and equity ($14,496).
    • The sum of debt and equity ($19,800) matches the total firm value, ensuring the balance sheet remains balanced.

Corporate Valuation Theory, Evidence and Practice – by M. E. Zmijewski; R. W. Holthausen