Introduction

Abstract

Corporations create value. Financial intermediation in the United States represented just 2 percent of Gross Domestic Product in 1870, but this had risen to almost 9 percent of GDP by 2010.¹ The addition of direct business investment brings this share to more than 18 percent of GDP, or about double the representation of finance markets in the size of the American economy. This mobilization of capital supported the rapid expansion of global trade over the period of the Industrial Revolution. But, the freezing of capital markets has plunged nations and the world into recessions and depressions on several different occasions, including the recent Global Financial Meltdown. Even the layperson now realizes that financial markets are essential for the smooth operation of the global economy. Yet, while most all this activity depends crucially on the correct valuation of the value corporations create, accurate models of corporate value have existed for only the last few generations.