Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

at which firms in different ratings classes trade to get a
measureofthediscount(ifany)thatisbeingappliedbythe
marketforthedegreeofdistresstowhichafirmisexposed.If
thereareenoughfirmsinthesectorthatweareanalyzingin
eachratingsclass,wecoulddothisonasectorbasis.Ifthere
arenot,wecouldlookatthemultipleacrosstheentiremarket
and examine differences across bond rating classes.

ILLUSTRATION 17.6: Adjusted Multiple: Global Crossing

Lookingatalltelecomfirmsandcategorizingthembasedon
bond ratings, we were able to estimate the value-to-book
ratios at the end of 2001 by bond rating class:

Bond RatingValue-to-Book Capital Ratio

A 1.70

BBB 1.61

BB 1.18

B 1.06

CCC 0.88

CC 0.61

Thedifferencesbetween ratingsclasses provideuswithan
indicationofthediscountthatwewouldapplywhenvaluing
distressedfirms.Forinstance,GlobalCrossingwithitsCCC
ratingshouldhaveamultiple thatisroughlyhalfthatofa
healthy A rated firm in the same sector.

Considering the Possibility of Distress Explicitly

Oneoftheadaptationsthatwesuggestedfordiscountedcash
flowvaluationwasanexplicitassessmentofdefaultriskand