TMA Valuation in Distressed Situations

Question 1

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

Accepted Answer

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

Answer

Dividend discount model

Answer

Book value of assets only

Answer

Price-to-earnings ratio analysis

Question 2

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

Accepted Answer

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

Answer

Distressed companies have no cost of equity

Answer

Regulators set the discount rate for bankruptcies

Answer

DCF is not used in bankruptcy valuations

Question 3

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

Accepted Answer

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

Answer

The company's IPO valuation

Answer

The book value of assets per the balance sheet

Answer

The value assuming maximum operational efficiency

Question 4

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

Accepted Answer

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

Answer

The ratio of debt to earnings

Answer

The book value multiple of the company

Answer

The premium paid over liquidation value

Question 5

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

Accepted Answer

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

Answer

EBITDA before interest payments

Answer

EBITDA calculated according to court-approved accounting methods

Answer

EBITDA divided by the number of creditor classes

Question 6

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

Accepted Answer

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

Answer

The liquidation value of the company's assets

Answer

The total amount of claims filed in the bankruptcy

Answer

The DIP financing amount approved by the court