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Valuation in Distressed Situations Flashcards

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  1. What is the most common valuation methodology used for a distressed company in Chapter 11?

    Answer: Discounted cash flow (DCF) and comparable company/transaction analysis

    DCF analysis combined with comparable company and precedent transaction analysis forms the standard valuation toolkit in Chapter 11, used to establish enterprise value for plan confirmation.

  2. Why is discount rate selection particularly challenging in distressing company valuations?

    Answer: The risk profile of a distressed company is unusual, making WACC estimation unreliable

    The capital structure of a distressed company is in flux and its risk profile differs markedly from healthy peers, making the weighted average cost of capital (WACC) difficult to estimate reliably.

  3. What is 'liquidation value' and when is it most relevant?

    Answer: The estimated proceeds from selling all assets quickly, often under forced conditions

    Liquidation value estimates what creditors would receive if assets were sold quickly — often at a discount — and is the floor used in the 'best interests of creditors' test in bankruptcy.

  4. What does 'enterprise value to EBITDA' multiple reflect in a distressed valuation?

    Answer: How the market values a company's operating earnings, used to benchmark valuations against peers

    The EV/EBITDA multiple reflects what investors pay for each dollar of operating earnings; in distressed valuations it is applied to normalized EBITDA to estimate sustainable enterprise value.

  5. What is 'normalized EBITDA' in the context of a distressed company?

    Answer: EBITDA adjusted to remove one-time items and reflect sustainable run-rate earnings

    Normalized EBITDA removes non-recurring charges, one-time items, and management adjustments to reflect what the business can sustainably earn under normal conditions.

  6. What is 'reorganization value' in a Chapter 11 plan?

    Answer: The going concern enterprise value of the reorganized company used to allocate value among stakeholders

    Reorganization value is the total enterprise value of the company as a going concern after emerging from bankruptcy, used to determine how much each creditor class recovers.

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