Valuation of the Company in Financial Distress
The valuation of the company in financial distress is a specific area of valuation, which has not been comprehensively analyzed yet. The question of the valuation of companies in time of crisis is partly mentioned in some specialized literature which centers upon the integration of problems of risks and uncertainty into activities concerning the investment decision and the valuation of companies. This integration is possible to carry out by adjusting the cash flows or the discounting rate.
Jméno a příjmení autora:
Milan Hrdý, Bohuslav Šimek
121 - 133
valuation, company, financial distress
DOI (& full text):
The contribution deals with so far not very deeply analyzed, but very important issues of corporate valuation in financial distress. Only Damodaran offers the solution based on the valuation of the…více
The contribution deals with so far not very deeply analyzed, but very important issues of corporate valuation in financial distress. Only Damodaran offers the solution based on the valuation of the company in the financial distress as the option on the base of the Black-Scholes model, but this is not possible use in the reality of the valuation in the Czech Republic. The solution of this problem requires the projection of the specifics of the financial distress of the firm into the common methods of valuation of the company without financial distress. Identification of single valuation methods depends, besides others, on the fact if the insolvency process has been initiated or not and if it is solved by bankruptcy or by reorganization. The property valuation is used in case of the bankruptcy with the negative result value. The income approach is possible to use only in case if the successful reorganization and restructuring of company is supposed, and it is necessary to distinguish whether the manufacturing is going to be restructured or not. If so, it is necessary to use three phase income method of valuation where the free cash flow must be recognized not only for cost of restructuring, but also for the extraordinary profit from selling or buying the new or old manufacturing equipment. Just the identification of the restructuring cost plays also a very important role in the process of the valuation. The interest rate for discounting of the free cash flow would also be identified separately for every phase and adjusted by risk surcharge. In case of net valuation of company it is necessary to subtract from the gross value not the value of liabilities on the date of valuation, but the target value of liabilities.