Estimating Distress Sale Proceeds
Oncewehaveestimatedtheprobabilitythatthefirmwillbe
unabletomakeitsdebtpaymentsandwillceasetoexist,we
have to consider the logical follow-up question: What
happensthen?Asnotedearlierinthechapter,itisnotdistress
persethatistheproblembut thefactthatfirmsin distress
havetoselltheirassetsforlessthanthepresentvalueofthe
expected futurecash flows. Often, they maybe unable to
claimeventhepresentvalueofthecashflowsgeneratedby
existinginvestments.Consequently,akeyinputthatweneed
toestimateistheexpectedproceedsintheeventofadistress
sale. We have three choices:
1.Estimatethepresentvalueoftheexpectedcashflowsina
discountedcashflowmodel,andassumethatthedistresssale
willgenerateonlyapercentage(lessthan 100 percent)ofthis
value.Thus,ifthediscountedcashflowvaluationyields$5
billion asthevalue oftheassets,we mayassumethat the
value will be only $3 billion in the event of a distress sale.
- Estimatethe presentvalue ofexpected cash flowsonly
from existing investments as the distress sale value.
Essentially,weareassuming that abuyer willnot pay for
futureinvestmentsin adistresssale.Inpractical terms,we
wouldestimatethedistresssalevaluebyconsideringthecash
flows from assets in place as a perpetuity (with no growth).
3.Themostpracticalwayofestimatingdistresssaleproceeds
istoconsiderthedistresssaleproceedsasapercentofbook