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DCF-Valuations of Companies in Crisis: Distress-Related Leverage, Identification of Risk Positions, Discounting Techniques, and “Beta Flips”

Author

Listed:
  • Meitner Matthias

    (Investment Manager Public Equities, Department of Accounting and Auditing, Friedrich-Alexander-University Erlangen-Nuernberg, Bavaria, Germany)

  • Streitferdt Felix G.

    (Business School, Nuremberg Institute of Technology, Bahnhofstraße 87, Nuremberg 90402, Germany)

Abstract

From the viewpoint of a well-diversified investor, an equity investment in an operationally distressed company resembles an equity investment in a financially levered company. However, the risk characteristics of the “virtual debt” in a distressed company are not necessarily identical to those of typical financial debt, which makes investments into distressed companies unique. In this paper, we show that risk-adjusted discount rates of distressed companies can differ quite significantly from those of healthy companies. We further illustrate how to determine such discount rates and how to account for these findings in practical discounted cash flow valuation cases.

Suggested Citation

  • Meitner Matthias & Streitferdt Felix G., 2014. "DCF-Valuations of Companies in Crisis: Distress-Related Leverage, Identification of Risk Positions, Discounting Techniques, and “Beta Flips”," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 9(1), pages 145-174, January.
    • Handle: RePEc:bpj:jbvela:v:9:y:2014:i:1:p:30:n:4
    DOI: 10.1515/jbvela-2013-0019
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    valuation; equity valuation; discounting; discounted cash flow; CAPM; beta; low cash flows; negative cash flows; distress;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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