Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )
“AccountingTransparencyandtheTermStructureofCredit Spreads,”workingpaper,2003.Theformerpresentsevidence thatthecostofdebtislower ...
33 It is a little unfair to pick on accountantsalone in this regard.Investment bankerswhodesign thespecial purpose entitiesforfi ...
CHAPTER 17 The Cost of Distress Inbothdiscounted cashflow(DCF)and relativevaluation, weimplicitlyassumethatthefirmsthatwearevalu ...
distressedfirmsmaycontinueto havevaluebecauseofthe limitedliabilityfeatureandoptioncharacteristicsofpublicly traded equity. POSS ...
publiclytradedfirmsintheUnitedStatesbetween 1980 and 1983 and foundthat 1,346firms had trouble making their interestexpensesfrom ...
2 Insummary,then,thepossibilityandcostsofdistressarefar toosubstantialtobeignoredinvaluation.Thequestionthen becomes not whether ...
youmightwonder,aretheargumentsofferedbyproponents of discounted cash flow valuation for not explicitly consideringthepossibility ...
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 ...
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