When corporations issue liabilities (debt at a bank or bonds to the public), we assume that they do so at fair market rates. This implies that, on the day the liability is issued, the cash received by the company is equal in value to the debt liability that is recorded on the balance sheet. Except for the possibility of a tax shelter (see Chapter 15), financing creates no value. Banks and insurance companies are different because their liabilities (e.g., demand deposits at a bank, or insurance policy reserves at an insurance company) involve services. Consequently, growth of deposits and of reserves actually creates value for shareholders. How would you construct a DCF valuation differently?
(a) For banks?
(b) For insurance companies?