Business Valuation in Distressed Situations Flashcards
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The 'enterprise value to EBITDA' (EV/EBITDA) multiple is particularly challenging to apply to distressed companies because:
Answer: Distressed companies often have negative or highly distorted EBITDA
Distressed companies frequently have depressed or negative EBITDA due to the financial crisis itself, making trailing multiples unreliable without normalization adjustments.
Which of the following best describes 'enterprise value' in a restructuring context?
Answer: The total value of the business available to all capital providers, calculated before deducting debt
Enterprise value represents the total going-concern value of the business operations, from which senior claims are subtracted in a 'waterfall' to determine recoveries by class.
When using precedent transaction analysis for a distressed company, analysts should:
Answer: Include distressed M&A transactions as comps since they reflect the current situation
Distressed precedent transactions provide the most relevant valuation benchmarks because they reflect similar risk profiles, buyer motivations, and market conditions.
A 'haircut to par' in bond valuation means:
Answer: The bond trades below its stated face value, reflecting credit distress
Distressed bonds trade at a discount to par value because the market prices in the risk of payment default or recovery of less than 100 cents on the dollar.
In a US restructuring, 'cramdown' allows a reorganization plan to be confirmed even though:
Answer: One or more dissenting classes of creditors have not voted to accept the plan
Cramdown allows the bankruptcy court to confirm a plan over the objection of a dissenting class, provided the plan meets specific statutory fairness standards.
Which factor most increases the valuation discount applied to a distressed company versus a healthy peer?
Answer: High customer concentration and dependency on relationships that may not survive restructuring
High customer concentration creates significant enterprise value risk because key customers may defect during the distress period, making the business harder to sell at full value.