Corporate Financial Distress, Restructuring, and Bankruptcy, 4th Edition
by Edward I. Altman, Edith Hotchkiss, Wei Wang
CHAPTER 5Valuation of Distressed Firms
Enterprise valuation plays a central role in negotiations over how and when to restructure a distressed firm, and significantly within Chapter 11 itself. Enabling a firm to reorganize presumes that the firm's going concern value is greater than the value that would be realized in a liquidation. The firm's estimated value determines the size of the pie to be divided among existing claimants, and drives projected payouts and recoveries. It is also critical in approving debtor‐in‐possession and exit financing, determining the feasibility of a plan, and in determining an appropriate capital structure for the reorganized firm. Finally, enterprise valuation is used in litigation to avoid (undo) preferential payments made by the debtor in the period prior to filing, as it is needed to demonstrate the debtor's insolvency at the time those payments were made.
Even under ideal market conditions and the sound application of valuation methodologies, different stakeholders frequently estimate widely divergent values for the firm. These estimates are based on forecasts of the future cash flow generating ability of the reorganized firm, and on the observed values of similar companies and transactions. While we are guided by well‐developed financial models, the forecasts themselves are fraught with uncertainty. Adding to this the likelihood that parties to a negotiation have conflicting interests for estimating low versus high valuations, and that experts ...