Valuation of distressed company

Boris Jurík

Master's thesis

Abstract:

The aim of the thesis is valuation of distressed company using valuation model that explicitly considers specific conditions accompanying distressed firms and their likelihood of default. The model is based on the idea that total firm value of distressed company is equal to average of company’s value as a going-concern, i.e. value under ordinary conditions and company’s value from liquidation sale value, weighted by its default probability. The need to modify traditional models for distress valuation is because traditional valuation methods are by default built on fundamental assumptions which may not hold true in every stage of firm’s life cycle. This could be for instance higher risk of default (start-ups, declining companies) or uncertainty of future cash flows (distressed companies). Therefore, in the thesis the model is carefully introduced and its individual components are described. Integral parts of the model include going-concern value, probability of default and distress sale value. In the practical part, distress adjusted model is applied on existing case of American retailer JCPenney in order to demonstrate its theoretical application. In the thesis we observe better suitability of this model for companies in distress and provide comments on its application. Using distress adjusted model we also identified that JCPenney’s stock is undervalued.

Abstract:

The aim of the thesis is valuation of distressed company using valuation model that explicitly considers specific conditions accompanying distressed firms and their likelihood of default. The model is based on the idea that total firm value of distressed company is equal to average of company’s value as a going-concern, i.e. value under ordinary conditions and company’s value from liquidation sale value, weighted by its default probability. The need to modify traditional models for distress valuation is because traditional valuation methods are by default built on fundamental assumptions which may not hold true in every stage of firm’s life cycle. This could be for instance higher risk of default (start-ups, declining companies) or uncertainty of future cash flows (distressed companies). Therefore, in the thesis the model is carefully introduced and its individual components are described. Integral parts of the model include going-concern value, probability of default and distress sale value. In the practical part, distress adjusted model is applied on existing case of American retailer JCPenney in order to demonstrate its theoretical application. In the thesis we observe better suitability of this model for companies in distress and provide comments on its application. Using distress adjusted model we also identified that JCPenney’s stock is undervalued.

Keywords

Distress, Valuation, Decline

Keywords

Valuation, Distress, Decline

Language used: English

Date on which the thesis was submitted / produced: 29. 11. 2018

Thesis defence

• Date of defence: 11. 9. 2019
• Supervisor: František Poborský
• Reader: David Pečonka

Vysoká škola ekonomická v Praze

Master programme:
Finance and Accounting