Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )
raisecapital(morelikelyequitythandebt)tokeepgoing.In buoyantanddevelopedfinancialmarkets,thisassumptionis not outlandish.Conside ...
distress—that is, the loss of all future cash flows—is not adequately captured in value. 4.Weadjusttheexpectedcash flowsfor thep ...
cashflowsforthepossibilityofdistress.Notonlydoweneed toestimatetheprobabilityofdistresseachyear,wehaveto keeptrackofthecumulativ ...
Easy accessto capital markets allows firms with good investments to raise debt or equity capital to sustain themselvesthroughba ...
Intraditionalvaluation,weusuallyestimateexpectedvalues foreachoftheinputvariables.Forinstance,invaluingafirm, wemayassumeanexpec ...
Step2:Wechooseaprobabilitydistributionforeachofthe variables.Thereareanumberofchoiceshere,rangingfrom discreteprobabilitydistrib ...
Step5:Theexpectedcashflowsareestimatedbasedonthe outcomesdrawninstep4.Ifthefirmmeetsthecriteriafora going concern,definedbeforet ...
bringtheeffectsofdistressintobothexpectedcashflowand discount rates. Estimating Expected Cash Flows Toconsidertheeffectsofdistre ...
whereπGoingconcern,tisthecumulativeprobabilitythatthe firmwillcontinueasagoingconcernthroughperiodt.The probabilities ofdistress ...
basedonpromisedcashflows(couponsandfacevalue)rather than expected cash flows. The presumption in a going concernvaluationisthatt ...
ofequity.Ineffect,this wouldmakethecost ofequityfor distressedfirmsmuchhigherthanhealthyfirmsinthesame business.Infact,somehavea ...
probabilities of distress (and survival) each year for the forecastperiod.Consequently,theexpectedcashflowsmay notincorporatethe ...
thisapproachisthatitallows ustoconsiderthepossibility that even distressed firms have a chance (albeit small) of becoming going ...
Akeyinputtothisapproachistheestimateofthecumulative probability of distress over the valuation period. In this section,weconside ...
heprovidedevidencetobackuphisclaim.Sincehisstudy, both academicsandpractitionershavedeveloped theirown versions of these credit ...
Oneadvantageofthisapproachisthatitcanbeextendedto coverthelikelihoodofdistressatfirms withoutsignificant debt.Forinstance,wecoul ...
Cumulative Probability of Distress Rating5 Years 10 Years AAA 0.03% 0.03% AA 0.18 0.25 A+ 0.19 0.40 A 0.20 0.56 A– 1.35 2.42 BBB ...
We can illustrate the use of this approach with Global Crossing. At the end of 2001, Global Crossing had been assignedabondratin ...
convertibility will render the approach unusable—but the bondpricehastobeavailable.Ifthecorporatebondissueis privately placed, t ...
Estimating Distress Sale Proceeds Oncewehaveestimatedtheprobabilitythatthefirmwillbe unabletomakeitsdebtpaymentsandwillceasetoex ...
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