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

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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.



  1. 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

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