CTA Business Valuation in Distressed Situations

Question 1

Which valuation method is most commonly used to establish 'enterprise value' in a US Chapter 11 plan of reorganization?

Accepted Answer

Comparable company analysis combined with discounted cash flow (DCF)

Answer

Courts and practitioners typically use a combination of comparable company analysis and DCF to establish the going-concern enterprise value for plan confirmation purposes.

Question 2

In distressed valuation, 'orderly liquidation value' (OLV) differs from 'forced liquidation value' (FLV) in that:

Accepted Answer

OLV assumes adequate marketing time to maximize asset sale proceeds

Answer

OLV assumes assets are sold over a reasonable period to qualified buyers, yielding higher proceeds than FLV, which assumes an urgent, compressed sale timeline.

Question 3

The 'going-concern premium' in a distressed business valuation represents:

Accepted Answer

The value of the assembled business above its liquidation value

Answer

The going-concern premium reflects the additional value created by an operating business — its customer relationships, workforce, and operational infrastructure — above what asset sales would yield.

Question 4

When applying a DCF to a distressed company, the discount rate should reflect:

Accepted Answer

A risk-adjusted rate that accounts for the elevated uncertainty and distress risk

Answer

A higher discount rate is used for distressed companies to account for greater uncertainty in projected cash flows and the elevated risk of plan failure.

Question 5

Which approach is most useful for valuing a distressed company with highly uncertain future cash flows?

Accepted Answer

Liquidation analysis provides the floor while DCF and market comps establish the range

Answer

Using liquidation analysis as a floor value combined with going-concern approaches provides a defensible valuation range for plan negotiations.

CTA - Certified Turnaround Analyst Practice Test

CTA - Certified Turnaround Analyst Practice Test

CTA Business Valuation in Distressed Situations