Business Valuation in Distressed Situations Flashcards
6 cards from real CTA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Business Valuation in Distressed Situations flashcards as text
What is the purpose of a 'solvency analysis' in a turnaround context?
Answer: To assess whether the company's assets exceed its liabilities and whether it can meet obligations as they come due
A solvency analysis establishes whether the company was insolvent at the time of specific transactions, which is critical for fraudulent conveyance and preference claim analysis.
In distressed valuation, 'normalized EBITDA' typically involves:
Answer: Adding back non-recurring charges, one-time restructuring costs, and distress-related expenses to arrive at a sustainable earnings base
Normalization removes distortion-causing items to show what earnings would look like in a stabilized, going-concern scenario, which is the relevant basis for valuation multiples.
Which valuation method establishes the minimum recovery threshold creditors should accept in a restructuring?
Answer: Liquidation analysis — creditors should not accept less than they would recover in liquidation
Liquidation value represents the floor — rational creditors will reject any restructuring plan that provides less than they would receive if assets were sold in a liquidation.
A 'waterfall analysis' in restructuring allocates enterprise value in what order?
Answer: Administrative expenses, then secured debt, then unsecured debt, then equity
The restructuring waterfall flows from highest-priority administrative claims down through secured debt, unsecured debt, and finally equity, which often receives nothing in insolvency.
When valuing intangible assets in a distressed company, the most critical consideration is:
Answer: Whether they retain value independently of the business or are dependent on the company continuing to operate
Many intangibles, such as customer relationships, trade secrets, or workforce value, may be worthless in isolation but highly valuable as part of a going concern, significantly affecting valuation.
In a Section 363 auction, a 'stalking horse' bidder serves what function?
Answer: The stalking horse establishes a floor bid, setting a minimum price and deal terms that competing bidders must exceed
The stalking horse bid prevents a fire-sale outcome by guaranteeing a minimum transaction value, encouraging other bidders to participate with higher offers.