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Valuing Declining and Distressed Companies

69 Pages Posted: 2 Jul 2009  

Aswath Damodaran

New York University - Stern School of Business

Date Written: June 23, 2009

Abstract

The most difficult companies to value are at either end of the life cycle, with young growth companies and declining companies posing the biggest challenges. In this paper, we focus on companies that are at the tail end of their life cycles and examine how best to value companies with flat and declining revenues and stagnant or dropping profit margins. Since many of these companies also have significant debt burdens, we also evaluate ways to incorporate the possibility of distress and default into value. We argue that conventional discounted cash flow valuations, premised on firms being going concerns, will tend to overstate the value of distressed companies, and suggest ways in which we can correct for the bias.

Keywords: Distress, DCF valuation, declining firms

JEL Classification: G12, G33, G34

Suggested Citation

Damodaran, Aswath, Valuing Declining and Distressed Companies (June 23, 2009). Available at SSRN: https://ssrn.com/abstract=1428022 or http://dx.doi.org/10.2139/ssrn.1428022

Aswath Damodaran (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0340 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.damodaran.com

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