Distressed Firm Valuation: A Scenario Discounted Cash Flow Approach
Posted: 10 Mar 2020 Last revised: 12 Sep 2020
Date Written: February 28, 2020
Valuation of a distressed company is a very tricky issue, for which many approaches and methods have been provided by the literature. Unfortunately, many of the more suitable proposals from a theoretical point of view (i.e., those based on option pricing theory, and even integrated with game theory) are very difficult to apply to real cases. To face the many contingencies emerging in a real case valuation, a scenario discounted cash flow (SDCF) model is provided here. The focus is on companies at an advanced stage of distress, where their ability to operate as a going concern is in question, and maintenance or the recovery of business continuity requires significant interventions in the firm’s strategic, operational, and financial structure. In this context, SDCF, with a number of arrangements elaborated here, appears useful for valuing assets, debt, and equity - from current or potential new investors - and the interactions between them, which are particularly critical for distressed companies. At the same time, SDCF takes into account a firm’s liquidation option, not only at the valuation date but even after a restructuring plan has been launched. Going-concern value including the liquidation option should be the reference point for judging the suitability of business continuity compared to liquidation. In presenting the model, the key concepts and methodology adopted are set out following a numerical example inspired by a real case.
Keywords: Distressed Firm Valuation, DCF, Scenario Valuation, Business Restructuring, Bankruptcy, Chapter 11, Asset Valuation, Debt Valuation, Equity Valuation
JEL Classification: G34, G32, G33, G30
Suggested Citation: Suggested Citation