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

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.

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

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.

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

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.

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 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.

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

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

TMA - Turnaround Management Association Practice Test

TMA - Turnaround Management Association Practice Test

TMA Valuation in Distressed Situations