Distressed Firm Valuation: Reorganization Plan and Going-Concern Capital Value

Abstract

Distressed firm valuation is a very complicated subject that has involved corporate finance literature and practice since a long time. Despite the topic’s relevance, contributions have been few and confined to stating only critical issues and proposing rather abstract solutions, seldom leading to “real-world” practices. This paper aims to develop an approach to distressed firm valuation, based on the discounted cash flow (DCF) and option pricing models, which can support corporate finance practice. The focus of the paper is on the going-concern value of the distressed firm to be compared with those arising from other feasible options (including the sale of company assets on an individual basis or bankruptcy value in a strict sense), along the complex process of managing the firm crisis.