CTA Business Valuation in Distressed Situations 1 — Questions and Answers
Question 1: Which valuation method is most commonly used to establish 'enterprise value' in a US Chapter 11 plan of reorganization?
- Book value of assets
- Comparable company analysis combined with discounted cash flow (DCF) (Correct answer)
- Liquidation value only
- Net asset value from the tax return
Correct answer: Comparable company analysis combined with discounted cash flow (DCF)
Courts and practitioners typically use a combination of comparable company analysis and DCF to establish the going-concern enterprise value for plan confirmation purposes.
Question 2: In distressed valuation, 'orderly liquidation value' (OLV) differs from 'forced liquidation value' (FLV) in that:
- OLV assumes adequate marketing time to maximize asset sale proceeds (Correct answer)
- FLV assumes more time to find buyers
- OLV is always lower than FLV
- OLV is used exclusively in Chapter 7 cases
Correct answer: OLV assumes adequate marketing time to maximize asset sale proceeds
OLV assumes assets are sold over a reasonable period to qualified buyers, yielding higher proceeds than FLV, which assumes an urgent, compressed sale timeline.
Question 3: The 'going-concern premium' in a distressed business valuation represents:
- The extra fee paid to the CRO
- The value of the assembled business above its liquidation value (Correct answer)
- The discount applied for lack of marketability
- The cost to replace all fixed assets at current market prices
Correct answer: The value of the assembled business above its liquidation value
The going-concern premium reflects the additional value created by an operating business — its customer relationships, workforce, and operational infrastructure — above what asset sales would yield.
Question 4: When applying a DCF to a distressed company, the discount rate should reflect:
- The company's pre-distress cost of capital
- A risk-adjusted rate that accounts for the elevated uncertainty and distress risk (Correct answer)
- The risk-free Treasury rate only
- The interest rate on the DIP facility
Correct answer: A risk-adjusted rate that accounts for the elevated uncertainty and distress risk
A higher discount rate is used for distressed companies to account for greater uncertainty in projected cash flows and the elevated risk of plan failure.
Question 5: Which approach is most useful for valuing a distressed company with highly uncertain future cash flows?
- Liquidation analysis provides the floor while DCF and market comps establish the range (Correct answer)
- Simple P/E multiple based on historical earnings
- Net present value of the pension liability
- Market capitalization divided by total debt
Correct answer: Liquidation analysis provides the floor while DCF and market comps establish the range
Using liquidation analysis as a floor value combined with going-concern approaches provides a defensible valuation range for plan negotiations.
Question 6: In the context of distressed M&A, a '363 sale' refers to:
- A sale requiring all creditors to approve
- A court-authorized asset sale under Section 363 of the Bankruptcy Code, free and clear of liens (Correct answer)
- A private equity buyout outside of court
- A sale of only the intellectual property of the debtor
Correct answer: A court-authorized asset sale under Section 363 of the Bankruptcy Code, free and clear of liens
Section 363 of the Bankruptcy Code allows a debtor to sell assets free and clear of all liens and encumbrances with court approval, providing clean title to buyers.
CTA Business Valuation in Distressed Situations 1
Which valuation method is most commonly used to establish 'enterprise value' in a US Chapter 11 plan of reorganization?