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Journal of Business Valuation and Economic Loss Analysis

Editor-in-Chief: Ewing, Bradley T. / Hoffman, Jim

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CiteScore 2017: 0.32

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1932-9156
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DCF-Valuations of Companies in Crisis: Distress-Related Leverage, Identification of Risk Positions, Discounting Techniques, and “Beta Flips”

Matthias Meitner
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  • Investment Manager Public Equities, Department of Accounting and Auditing, Friedrich-Alexander-University Erlangen-Nuernberg, Bavaria, Germany
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/ Felix G. Streitferdt
Published Online: 2014-08-05 | DOI: https://doi.org/10.1515/jbvela-2013-0019

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.

Keywords: valuation; equity valuation; discounting; discounted cash flow; CAPM; beta; low cash flows; negative cash flows; distress

JEL Classification: G12; M21

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About the article

Published Online: 2014-08-05

Published in Print: 2014-01-01


Citation Information: Journal of Business Valuation and Economic Loss Analysis, Volume 9, Issue 1, Pages 145–174, ISSN (Online) 1932-9156, ISSN (Print) 2194-5861, DOI: https://doi.org/10.1515/jbvela-2013-0019.

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