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201
5
Technical Valuation Issues
Valuation Adjustment
TRA
CK
B
Valuation Adjustment
Grant W. Newton, Presiding OfficerAssociation of Insolvency and Restructuring Advisors Medford, Ore.
David M. Hillman, ModeratorSchulte Roth & Zabel LLP; New York
Bruce B. BinghamCapstone Advisory Group, LLC; New York
Joseph A. DiSalvatoreGrant Thornton LLP; New York
Perry M. MandarinoPwC; New York
Dr. Faten SabryNERA Economic Consulting; New York
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AmericAn BAnkruptcy institute
159
Val
uat
ion
Ad
just
men
t
1 Va
lcon
201
5
Pres
ente
d B
y:
Dav
id M
. Hill
man
(Mod
erat
or)
Sch
ulte
Rot
h &
Zab
el L
LP
P
erry
M. M
anda
rino
Pw
C
B
ruce
B. B
ingh
am
Cap
ston
e A
dvis
ory
Gro
up, L
LC
D
r. Fa
ten
Sab
ry
NE
RA
Eco
nom
ic C
onsu
lting
Jose
ph A
. DiS
alva
tore
G
rant
Tho
rnto
n LL
P
VALCON 2015
160
2 Va
lcon
201
5
Sel
ectin
g Va
luat
ion
Met
hodo
logi
es
–
Per
ry M
. Man
darin
o, P
wC
C
ompa
rabi
lity
Ana
lysi
s-G
uide
line
Com
pani
es &
Tra
nsac
tions
– B
ruce
B. B
ingh
am, C
apst
one
Adv
isor
y G
roup
, LLC
Th
e E
cono
mic
s of
the
Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
– D
r. Fa
ten
Sab
ry, N
ER
A E
cono
mic
Con
sulti
ng
Va
luat
ion
Adj
ustm
ents
Rea
sona
blen
ess
of C
ash
Flow
Pro
ject
ions
C
ontin
gent
Ass
ets
& L
iabi
litie
s Va
luat
ion
Issu
es
–
Jos
eph
A. D
iSal
vato
re, G
rant
Tho
rnto
n LL
P
Out
line
AmericAn BAnkruptcy institute
161
Sel
ecti
ng
Va
lua
tion
Met
hod
olog
ies
3 Va
lcon
201
5 • S
elec
ting
Met
hodo
logy
Val
uatio
n • M
anda
rino
Perr
y M
. Man
dari
no
Par
tner
, US
Bus
ines
s R
ecov
ery
Ser
vice
s Le
ader
P
wC
VALCON 2015
162
Valu
atio
n M
etho
dolo
gies
Ove
rvie
w
* Not
e: A
ltern
ativ
e in
com
e ap
proa
ches
hav
e be
en p
ropo
sed
(cap
ital c
ash
flow
met
hod,
adj
uste
d pr
esen
t val
ue m
etho
d) b
ut a
re le
ss
esta
blis
hed
in c
ourts
and
am
ong
prac
titio
ners
Goi
ng C
once
rn A
ssum
ptio
n Li
quid
atio
n A
ssum
ptio
n
Bas
ic V
alua
tion
Met
hodo
logi
es
Inco
me
App
roac
h
Dis
coun
ted
Cas
h Fl
ow*
Alte
rnat
ive
App
roac
hes
Mar
ket
App
roac
h
Trad
ing
Mul
tiple
s P
rece
dent
Tr
ansa
ctio
n M
ultip
les
Ass
et
App
roac
h
Ord
erly
Li
quid
atio
n Fo
rced
Li
quid
atio
n
4 Va
lcon
201
5 • S
elec
ting
Met
hodo
logy
Val
uatio
n • M
anda
rino
AmericAn BAnkruptcy institute
163
“Sup
plem
enta
l” M
etho
dolo
gies
E
xam
ples
of c
erta
in “s
uppl
emen
tal”
met
hodo
logi
es in
clud
e:
Ret
urn
(hur
dle
rate
) – b
ased
val
uatio
n: s
eeks
to a
nsw
er th
e qu
estio
n of
ho
w m
uch
shou
ld a
buy
er b
e w
illin
g to
pay
for a
n as
set g
iven
a s
peci
fic
retu
rn ta
rget
(e.g
. 30%
)
Opt
ion
base
d va
luat
ion:
•
of in
divi
dual
sec
uriti
es (e
xam
ple:
Am
eric
an A
irlin
es b
ankr
uptc
y)
•of
“who
le” a
sset
s/bu
sine
sses
(muc
h le
ss s
traig
htfo
rwar
d in
pra
ctic
al
appl
icat
ions
than
any
of t
he o
ther
app
roac
hes)
In c
erta
in c
ircum
stan
ces,
thes
e su
pple
men
tal m
etho
dolo
gies
can
pro
vide
a
usef
ul c
ross
-che
ck a
s to
the
reas
onab
lene
ss o
f a v
alua
tion
arriv
ed a
t via
the
“bas
ic” a
ppro
ache
s:
Exam
ple:
ret
urn
base
d va
luat
ion
in a
sce
nario
whe
re fi
nanc
ial
spon
sors
/dis
tress
ed f
unds
are
the
mos
t lik
ely
pote
ntia
l buy
ers
of a
n as
set
5
Valc
on 2
015
• Sel
ectin
g M
etho
dolo
gy V
alua
tion
• Man
darin
o
VALCON 2015
164
Supp
lem
enta
l Met
hodo
logi
es (c
ont’d
) O
ptio
n ba
sed
valu
atio
n, in
add
ition
to b
eing
the
right
met
hodo
logy
for c
erta
in
type
s of
indi
vidu
al s
ecur
ities
, can
pot
entia
lly b
e he
lpfu
l in
eval
uatio
n of
the
valu
e co
ntrib
utio
n of
ass
et v
olat
ility
whi
ch is
(gen
eral
ly s
peak
ing)
hig
her i
n di
stre
ssed
si
tuat
ions
as
com
pare
d to
non
-dis
tress
ed b
usin
esse
s
•In
fact
, the
equ
ity v
alue
of s
ubor
dina
ted
clai
ms
(e.g
. equ
ity) i
n a
dist
ress
ed e
ntity
freq
uent
ly c
onsi
sts
entir
ely
of th
e “o
ptio
n va
lue”
•H
owev
er, q
uant
ifyin
g th
is c
ontri
butio
n w
ith a
n ac
cept
able
deg
ree
of
prec
isio
n m
ay n
ot b
e pr
actic
al d
ue to
the
tech
nica
l com
plex
ity o
f the
ap
prop
riate
met
hodo
logi
es a
nd th
eir s
ensi
tivity
to th
e un
derly
ing
assu
mpt
ions
6 Va
lcon
201
5 • S
elec
ting
Met
hodo
logy
Val
uatio
n • M
anda
rino
AmericAn BAnkruptcy institute
165
Sele
ctio
n an
d R
elat
ive
Wei
ghtin
g Fa
ctor
s Fa
ctor
s dr
ivin
g se
lect
ion/
rela
tive
wei
ghtin
g of
var
ious
val
uatio
n m
etho
dolo
gies
ge
nera
lly b
reak
dow
n in
to tw
o gr
oups
•Si
tuat
iona
l con
text
Fo
r exa
mpl
e, v
alua
tion
base
d on
goi
ng c
once
rn v
s liq
uida
tion
•D
ata
avai
labi
lity
Suf
ficie
ntly
com
para
ble
data
may
not
be
avai
labl
e fo
r tra
ding
mul
tiple
s or
pr
eced
ent t
rans
actio
n m
ultip
les,
lead
ing
the
anal
yst t
o un
derw
eigh
t the
va
luat
ion
rang
es d
eriv
ed v
ia th
ese
two
met
hodo
logi
es
On
the
othe
r han
d, lo
nger
term
fore
cast
requ
ired
to p
erfo
rm a
DC
F ba
sed
valu
atio
n m
ay b
e su
ffici
ently
“sus
pect
” and
lead
the
anal
yst t
o un
derw
eigh
t th
e D
CF
rang
e vs
rang
es o
btai
ned
unde
r oth
er v
alua
tion
met
hods
7 Va
lcon
201
5 • S
elec
ting
Met
hodo
logy
Val
uatio
n • M
anda
rino
VALCON 2015
166
Dis
coun
ts
Dis
coun
ts a
re a
djus
tmen
ts a
pplie
d to
the
valu
atio
n ra
nge
deriv
ed fr
om th
e ba
sic
valu
atio
n m
etho
dolo
gies
. Dis
coun
ts re
pres
ent c
erta
in fa
ctor
s th
at a
re re
leva
nt
from
the
valu
atio
n bu
t are
not
acc
ount
ed fo
r und
er th
e ba
sic
valu
atio
n m
etho
dolo
gies
.
•M
arke
tabi
lity
(or r
elat
ive
lack
of l
iqui
dity
)
•M
inor
ity in
tere
st (n
egat
ive
“con
trol p
rem
ium
”)
•S
ize
– no
te th
at th
e si
ze d
isco
unt i
s fre
quen
tly e
xplic
itly
refle
cted
in th
e D
CF
anal
ysis
via
siz
e-re
late
d ris
k pr
emiu
m; i
t can
als
o be
exp
licitl
y in
corp
orat
ed in
the
mul
tiple
-bas
ed a
naly
sis
by a
pply
ing
a di
scou
nt to
the
mul
tiple
refle
ctin
g re
lativ
e si
ze c
ompa
rison
s
•“E
vent
”-dr
iven
dis
coun
ts: s
houl
d in
theo
ry re
flect
situ
atio
nal c
onte
xt
surr
ound
ing
a di
stre
ssed
ass
et (i
.e. h
ighe
r ris
k), b
ut q
uant
ifica
tion
is
subj
ect t
o si
gnifi
cant
unc
erta
inty
and
may
not
be
prac
tical
8
Valc
on 2
015
• Sel
ectin
g M
etho
dolo
gy V
alua
tion
• Man
darin
o
AmericAn BAnkruptcy institute
167
Com
pa
rabi
lity
An
aly
sis-
Gu
idel
ine
Com
pa
nie
s &
Tra
nsa
ctio
ns
9 Va
lcon
201
5 • C
ompa
rabi
lity
Ana
lysi
s • B
ingh
am
Bru
ce B
. Bin
gham
, FA
SA
, FR
ICS
E
xecu
tive
Dir
ecto
r, V
alua
tion
Cap
ston
e A
dvis
ory
Gro
up
VALCON 2015
168
Why
Bot
her?
Best
fact
ual b
asis
for a
pplyi
ng th
e M
arke
t App
roac
h
•R
elie
s on
finan
cial s
tate
men
ts fil
ed w
ith th
e SE
C o
r tra
nsac
tions
reco
rded
in p
ublic
mar
kets
•
Prov
ides
hist
orica
l bas
es fo
r com
paris
on a
s op
pose
d to
ta
rget
com
pany
’s ow
n pr
ojec
tions
•
Cou
rt w
arin
ess
abou
t com
pany
/Lev
el 3
pro
ject
ions
10
Valc
on 2
015
• Com
para
bilit
y A
naly
sis
• Bin
gham
AmericAn BAnkruptcy institute
169
Typi
cal P
roce
ss
•Id
entify
targ
et’s
SIC
Code
or N
AICS
Cod
e •
Esta
blish
sear
ch cr
iteria
: size
, per
form
ance
, geo
grap
hy,
mar
kets,
capit
al str
uctu
re, e
tc.
•Se
arch
esta
blish
ed d
atab
ase
such
as C
apita
l IQ fo
r G
uideli
ne C
ompa
nies u
sing
sear
ch cr
iteria
•
Esta
blish
qua
ntita
tive
and
quali
tativ
e ba
ses f
or co
mpa
rison
•
For t
rans
actio
ns: L
ook-
back
per
iod, a
nnou
nced
or c
losed
, co
ntro
l or n
ot
•Ar
ray d
ata
for a
nalys
is •
Dete
rmine
and
supp
ort a
ny d
iscou
nts t
o co
mp
med
ians
11
Valc
on 2
015
• Com
para
bilit
y A
naly
sis
• Bin
gham
VALCON 2015
170
Qua
ntita
tive
and
Qua
litativ
e Q
uant
itativ
e Cr
iteria
•Re
venu
es
•G
ross
& N
et P
rofit
Mar
gins*
•
EBIT
DA*
•Ne
t Inco
me
•Bo
ok V
alue*
•
Debt
-Equ
ity S
plit
•G
rowt
h •
Liquid
ity
•Di
viden
d Pa
ying
Capa
city*
Qua
litativ
e Cr
iteria
•De
pth
of M
anag
emen
t* •
Mar
kets/
Ease
of E
ntry
* •
Pate
nt/P
ropr
ietar
y Kno
wled
ge
•Pr
oduc
t Dive
rsific
ation
* •
Geo
grap
hic P
enet
ratio
n •
Nam
e/Br
and
Reco
gnitio
n*
* Cite
d in
Esta
te o
f Vict
or P.
Clar
ke Ta
x Cas
e
12
Va
lcon
201
5 • C
ompa
rabi
lity
Ana
lysi
s • B
ingh
am
AmericAn BAnkruptcy institute
171
Sam
ple
Com
paris
on-1
Al
bem
arle
Corp
.Ch
ina G
engS
heng
M
iner
als, I
ncCh
ina R
are E
arth
Ho
ldin
gs L
td.
Imer
ys S
AKr
osak
i Har
ima
Corp
.M
iner
als
Tech
nolog
ies In
c.OM
Gro
up In
c.
Shin
agaw
a Re
fracto
ries C
o.,
Ltd.
Oper
ation
alBu
sines
s Op
erat
ions b
y Re
venu
e
Flam
e reta
rdan
ts on
ly 38
% of
LTM
3/31
/10
reven
ue. I
n add
ition
, ha
s 38%
catal
ysts
and 2
5% fi
ne
chem
icals
opera
tions
. Refr
actor
y pro
ducts
86
% of
LTM
3/31
/10
reven
ue, 2
%
indus
trial
ceram
ic. In
ad
dition
, has
12%
fra
cture
prop
pant
opera
tions
.
Refra
ctory
mate
rials
and p
rodu
cts on
ly 47
% of
FY
12/31
/2009
reve
nue.
In
addit
ion, h
as 53
%
rare e
arth o
perat
ions.
Mine
rals f
or ce
ramics
, ref
ractor
ies, a
bras
ive
and f
ound
ry 28
% of
FY
12/31
/2009
reve
nue,
31%
mate
rials
and
mono
lithic
s. In
ad
dition
, has
23%
pig
ments
for p
aper
and
18%
perfo
rman
ce an
d fil
tratio
n mine
rals
opera
tions
.
Refra
ctory
prod
ucts
74%
of L
TM 12
/31/09
rev
enue
, 19%
old
furn
ace,
3% fi
ne
ceram
ics. I
n add
ition
, ha
s 1%
real
estat
e op
eratio
ns.
Refra
ctory
mate
rials
only
31%
of L
TM
4/4/20
10 re
venu
e. In
ad
dition
, has
69%
sp
ecial
ty mi
neral
s op
eratio
ns.
Adva
nced
mate
rials
55%
of L
TM
3/31/1
0 rev
enue
. In
addit
ion, h
as 4
5%
spec
ialty
chem
icals
opera
tions
.
Refra
ctory
mate
rials
86%
of L
TM
12/31
/09 re
venu
e. In
ad
dition
, has
14%
en
ginee
ring s
ervice
s op
eratio
ns.
Indu
stries
Se
rved
pe
troleu
m ref
ining
co
mpan
ies, s
pecia
lty
chem
ical c
ompa
nies,
and o
thers
iron,
steel,
ceme
nt,
chem
ical, c
oal, g
lass,
petro
chem
ical, n
on-
ferro
us, e
lectri
c po
wer a
nd ot
hers
petro
chem
ical, s
teel
metal
lurgy
, non
-fer
rous
meta
llurg
y, gla
ss, co
nstru
ction
ma
terial
s, fer
tilize
r, ce
ramic,
glas
s, ele
ctron
ic an
d othe
rs
indus
trial
equip
ment,
au
tomob
ile,
infras
tructu
re,
cons
tructi
on, p
aper,
ref
ractor
y, ce
ment
factor
ies an
d othe
rs
refrac
tories
, iron
, stee
l, ce
ment,
nonf
errou
s me
tals,
glass,
en
ginee
ring,
autom
obile
, and
othe
rs
steel,
iron
, refr
actor
y, me
tallur
gical
prod
ucts
and
mark
ets, n
on- f
errou
s me
tal, g
lass,
pape
r, an
d othe
rs
batte
ry, p
owde
r me
tallur
gy, c
erami
c, ch
emica
l, com
puter
, co
nsum
er ele
ctron
ic,
tire a
nd ot
hers
steel,
nonf
errou
sme
tal, c
erami
cind
ustry
and o
thers
Geog
raph
ic Br
eakd
own
by
Reve
nue
40%
FY
12/31
/09
reven
ue fr
om U
SA,
60%
forei
gn
Not d
iversi
fied.
10
0% L
TM 3/
31/10
rev
enue
from
Chin
a
86%
FY
12/31
/09
reven
ue fr
om C
hina,
6% Ja
pan,
5%
Euro
pe, 3
% U
SA,
1% ot
her
36%
FY
12/31
/09
reven
ue fr
om W
ester
n Eu
rope
, 25%
Fran
ce,
23%
USA
/Can
ada,
12%
As
ia-Oc
eania
, 5%
othe
r
Not d
iversi
fied.
100%
LT
M 12
/31/09
reve
nue
from
Japa
n (89
% F
Y 3/3
1/09 r
even
ue fr
om
Japa
n, 5%
Spa
in, 4%
Ch
ina, 3
% U
SA)
53%
FY
12/31
/09
reven
ue fr
om U
SA,
31%
Eur
ope/A
frica
, 9%
Asia
, 7%
Ca
nada
/ Lati
n Am
erica
31%
FY
12/31
/09
reven
ue fr
om O
ther,
30%
Finl
and,
22%
Ja
pan,
18%
USA
81%
LTM
12/31
/09
reven
ue fr
om Ja
pan,
17%
Asia
, 2%
othe
r
13
Valc
on 2
015
• Com
para
bilit
y A
naly
sis
• Bin
gham
VALCON 2015
172
Sam
ple
Com
paris
on-2
Albem
arle C
orp.
China
GengS
heng
Miner
als, In
cCh
ina Ra
re Eart
h Ho
ldings L
td.Im
erys S
AKr
osaki H
arima
Co
rp.Mi
nerals
Tec
hnolog
ies Inc
.OM
Group
Inc.
Shinag
awa
Refra
ctorie
s Co.,
Ltd.
Financ
ialSiz
e by L
TM
Reven
ueLar
gerSig
nifican
tly sm
aller
Smalle
rLar
gerLar
gerLar
gerLar
gerLar
ger
Estima
ted
EBITD
A Gr
owth
Strong
er FY+
1, sim
ilar FY
+2Str
onger F
Y+1.
FY+2
estima
ted
EBITD
A is no
t ava
ilable.
FY 20
10 and
FY
2011 e
stimate
d EB
ITDA's
are no
t ava
ilable
Strong
er FY+
1, sim
ilar FY
+2FY
2010
and FY
2011
estima
ted EB
ITDA's
are
not av
ailable
Strong
er FY+
1, low
er FY+
2Str
onger F
Y+1,
lower F
Y+2
FY 20
10 and
FY
2011 e
stimate
d EB
ITDA's
are no
t ava
ilable
Analy
st Co
verage
Adequ
ateFor
ward e
stimate
s pro
vided
by onl
y one
analys
t
No co
verage
Adequ
ateNo
cover
ageFor
ward e
stimate
s pro
vided
by onl
y two
analys
ts
Forwa
rd estim
ates
provid
ed by
only
two an
alysts
No co
verage
Stock
Excha
ngeNY
SEAM
EXSE
HKEN
XTPA
TSE
NYSE
NYSE
TSE
New Y
ork Sto
ck Exc
hange
Americ
an Sto
ck Exc
hange
The Sto
ck Exc
hange
of Hong
Kong
Ltd.
Eurone
xt Paris
The To
kyo Sto
ck Exc
hange
New Y
ork Sto
ck Exc
hange
New Y
ork Sto
ck Exc
hange
The To
kyo Sto
ck Exc
hange
14
14
Valc
on 2
015
• Com
para
bilit
y A
naly
sis
• Bin
gham
AmericAn BAnkruptcy institute
173
Th
e E
con
omic
s of
th
e C
ost
of C
ap
ita
l fo
r D
istr
esse
d C
omp
an
ies
Fate
n S
abry
, Ph.
D.
Sen
ior
Vic
e P
resi
dent
, Ban
krup
tcy
Pra
ctic
e C
hair
N
ER
A E
cono
mic
Con
sult
ing
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
15
VALCON 2015
174
Road
map
-E
stim
atin
g th
e co
st o
f cap
ital
-
Cos
t of c
apita
l cha
lleng
es
◦B
eta
◦C
apita
l stru
ctur
e an
d th
e co
st o
f deb
t ◦
Add
ition
al c
halle
nges
-R
econ
cilia
tion
Va
lcon
201
5 • C
ost o
f Cap
ital f
or D
istre
ssed
Com
pani
es •
Sab
ry
16
AmericAn BAnkruptcy institute
175
Disc
ount
Rat
e Met
hodo
logi
es
•CA
PM
•M
odifi
ed C
AP
M
•
Fam
a- F
renc
h
•Bu
ild-u
p m
etho
d
•M
arke
t par
ticipa
nt e
stim
ates
Va
lcon
201
5 • C
ost o
f Cap
ital f
or D
istre
ssed
Com
pani
es •
Sab
ry
17
VALCON 2015
176
Som
e Com
mon
Poi
nts o
f Con
tent
ion
•Be
ta
•
Equit
y risk
pre
mium
•Sm
all st
ock p
rem
ium
•
Com
pany
-spe
cific
risk p
rem
ium
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
18
AmericAn BAnkruptcy institute
177
Chal
leng
es w
ith W
ACC
for D
istr
esse
d Co
mpa
nies
WA
CC
= w
e * (R
f +β
(ER
P) +
SS
P) +
wd *
Kd(
1-T)
WA
CC
= w
eigh
ted
aver
age
cost
of c
apita
l
We
= eq
uity
wei
ghtin
g
Rf =
risk
-free
rate
β =
Bet
a
ER
P =
equi
ty ri
sk p
rem
ium
SS
P =
smal
l sto
ck p
rem
ium
Wd =
debt
wei
ghtin
g
Kd
= co
st o
f deb
t
T= ta
x ra
te
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
19
VALCON 2015
178
Dist
ress
Co H
ypot
hetic
al
5 Ye
ars
Prio
r to
Ban
krup
tcy
4 Ye
ars
Prio
r to
Ban
krup
tcy
3 Ye
ars
Prio
r to
Ban
krup
tcy
2 Ye
ars
Prio
r to
Ban
krup
tcy
1 Ye
ar P
rior
to B
ankr
uptc
y
050100
150
200
250
Inde
xed
Stoc
k Pr
ice
Char
t 5
Year
s Pr
ior
to B
ankr
uptc
y
Dis
tress
Co
S&P
500
Inde
xD
ata
are
from
Blo
ombe
rg, L
LP.
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
20
AmericAn BAnkruptcy institute
179
Bet
a
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
21
VALCON 2015
180
Beta
and
the C
ost o
f Equ
ity
Capit
al M
arke
ts Lin
e Se
curity
Mar
ket L
ine
Cam
pbel
l R. H
arve
y an
d S
teph
en G
ray
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
22
AmericAn BAnkruptcy institute
181
Dist
ress
Co H
ypot
hetic
al:
Choi
ce o
f Bet
a Est
imat
ion
Peri
od
See
, for
exa
mpl
e, D
amod
aran
The
Dar
k S
ide
of V
alua
tion
(200
1) a
nd F
erna
ndez
On
the
Inst
abili
ty o
f Bet
as (2
004)
.
2.5
2.6
2.9
4.3
4.5
012345
For t
he 5
Yea
rs P
rior
to B
ankr
uptc
yFo
r the
4 Y
ears
Prio
rto
Ban
krup
tcy
For t
he 3
Yea
rs P
rior
to B
ankr
uptc
yFo
r the
2 Y
ears
Prio
rto
Ban
krup
tcy
For t
he 1
Yea
r Prio
r to
Ban
krup
tcy
Beta Estimate
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
23
VALCON 2015
182
Dist
ress
Co H
ypot
hetic
al:
Annu
al B
eta E
stim
ates
with
Con
fiden
ce In
terv
al
Dat
a ar
e fro
m B
loom
berg
LLP
.
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
24
AmericAn BAnkruptcy institute
183
Othe
r Bet
a Est
imat
ion
Issu
es
•Illi
quid
sec
uritie
s?
•
Inte
rnat
iona
l com
pani
es?
•
Sele
ctio
n of
dai
ly, w
eekly
or m
onth
ly re
turn
s?
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
25
VALCON 2015
184
Beta
Sani
ty C
heck
•Ec
onom
ic th
eory
and
eco
nom
etric
stu
dies
sug
gest
fa
ctor
s th
at m
ay a
ffect
bet
a •
Div
iden
d pa
yout
ratio
•E
arni
ngs
varia
nce
•C
yclic
al e
arni
ngs
•G
row
th
•S
ize
•Ill
iqui
d ba
lanc
e sh
eet a
sset
s
N
otes
: S
ee, f
or e
xam
ple,
stu
dies
by
Bea
ver,
Ket
tler,
and
Sch
oles
(197
0); R
osen
berg
and
Mar
athe
(197
6); R
osen
berg
an
d G
uy (1
995)
; Cam
pbel
l, P
olk,
and
Vuo
lteen
aho
(200
5); a
nd O
rtiz-
Mol
ina
and
Phi
llips
(201
0) .
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
26
AmericAn BAnkruptcy institute
185
Cap
ital S
truc
ture
and
the
Cos
t of D
ebt
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
27
VALCON 2015
186
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
0
200
400
600
800
1,00
0
1,20
0
1,40
0
1,60
0
Debt-Capitalization Ratio
Total Debt Outstanding Market Capitalziation ($ in MM)De
bt-to
-Cap
italiz
atio
n Ra
tio fo
r Dis
tress
Co5
Year
s Pr
ior t
o Ba
nkru
ptcy
Tota
l Deb
t Out
stan
ding
(LH
S)M
arke
t Cap
italiz
atio
n (L
HS)
Deb
t-to-
Equi
ty R
atio
(RH
S)
Dis
tres
sCo
Exam
ple:
Ch
ange
in D
ebt/
Cap
ital
izat
ion
Rati
o
Dat
a ar
e fro
m B
loom
berg
LLP
. Va
lcon
201
5 • C
ost o
f Cap
ital f
or D
istre
ssed
Com
pani
es •
Sab
ry
28
AmericAn BAnkruptcy institute
187
Dist
ress
Co H
ypot
hetic
al:
Yiel
d to
Mat
urity
5 Ye
ars
Prio
r to
Ban
krup
tcy
4 Ye
ars
Prio
r to
Ban
krup
tcy
3 Ye
ars
Prio
r to
Ban
krup
tcy
2 Ye
ars
Prio
r to
Ban
krup
tcy
1 Ye
ar P
rior
to B
ankr
uptc
y
020406080100
120
Yield to Maturity (%)
Ban
krup
tcy
D
ate
Dat
a ar
e fro
m B
loom
berg
LLP
.
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
29
VALCON 2015
188
Add
ition
al C
halle
nges
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
30
AmericAn BAnkruptcy institute
189
Addi
tiona
l Cha
lleng
es
•C
ost o
f equ
ity a
nd c
ost o
f deb
t?
•
Tax
effe
ct?
•
Mar
ket d
istre
ss?
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
31
VALCON 2015
190
Mar
ket D
istr
ess
Dam
odar
an E
RP E
stim
ate
and
VIX
0%1%2%3%4%5%6%7%
0%5%10%
15%
20%
25%
30%
35%
1990
1995
2000
2005
2010
VIX
Dam
odar
an E
stim
ated
ER
P
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
32
AmericAn BAnkruptcy institute
191
Reco
ncili
ng R
esul
ts
•In
tern
al c
onsis
tenc
y?
•
Rec
oncil
iatio
n w
ith m
arke
t val
ues
and
resu
lts fr
om
mar
ket a
ppro
ach?
•Sa
nity
che
ck
•In
dust
ry?
•R
atin
g?
Valc
on 2
015
• Cos
t of C
apita
l for
Dis
tress
ed C
ompa
nies
• S
abry
33
VALCON 2015
192
Va
lua
tion
Ad
just
men
ts
Rea
son
abl
enes
s of
Ca
sh F
low
P
roje
ctio
ns
(R
e: T
esti
ng
Rea
son
abl
enes
s of
Un
der
lyin
g
Ass
um
pti
ons)
Jose
ph A
. DiS
alva
tore
M
anag
ing
Dir
ecto
r, F
oren
sic
and
Val
uati
on S
ervi
ces
Gra
nt T
horn
ton
34
Valc
on 2
015
• Val
uatio
n A
djus
tmen
ts o
f Cas
h Fl
ow P
roje
ctio
ns •
DiS
alva
tore
AmericAn BAnkruptcy institute
193
Why
wer
e th
e "P
roje
ctio
ns" c
reat
ed?
Low
H
igh
Inve
st A
dditi
onal
Cap
ital
Ref
inan
ce w
ith C
urre
nt /
New
Len
ders
Pur
sue
a G
oing
C
once
rn S
ale
Res
truct
ure
/ Con
tinue
as
a G
oing
Con
cern
File
Ban
krup
tcy
and
Pur
sue
a R
estru
ctur
ing
Liqu
idat
e
Impa
ct
The
Firs
t Que
stion
Sho
uld A
lway
s Be…
35
Valc
on 2
015
• Val
uatio
n A
djus
tmen
ts o
f Cas
h Fl
ow P
roje
ctio
ns •
DiS
alva
tore
VALCON 2015
194
Qua
lifica
tions
of t
he P
repa
rer
Is it
thei
r Prim
ary
Res
pons
ibilit
y
W
hat is
the
prep
arer
's ba
ckgr
ound
Doe
s th
e Pr
epar
er p
osse
s ad
equa
te te
chni
cal tr
aini
ng
D
oes
the
prep
arer
hav
e re
leva
nt e
xper
ienc
e
W
as th
ere
third
par
ty a
ssist
ance
? If
so, w
ho?
36
Valc
on 2
015
• Val
uatio
n A
djus
tmen
ts o
f Cas
h Fl
ow P
roje
ctio
ns •
DiS
alva
tore
AmericAn BAnkruptcy institute
195
Mod
elin
g Te
chni
ques
and
Ass
umpt
ions
Bot
tom
's-u
p ap
proa
ch
U
se g
loba
l top
-line
ass
umpt
ions
Gro
w R
even
ue o
ver
prio
r yea
r
Hol
d m
argi
ns
cons
tant
, etc
.
Com
bina
tion
of B
otto
m's
-up
&
Glo
bal t
op-li
ne a
ssum
ptio
ns
O
n a
segm
ente
d or
bus
ines
s un
it ba
sis,
or
En
tity
as a
who
le
An
nual
by
quar
ter,
annu
al b
y m
onth
ass
umpt
ions
Mod
elin
g Te
chni
ques
Com
mod
ity C
ost
C
ompe
titiv
e/ M
arke
t Sha
re
Pr
oduc
t/Ser
vice
s M
ix
As
set U
tiliz
atio
n/C
apac
ity
C
apX
Req
uire
men
ts
La
bor/A
dmin
istr
ativ
e C
ost
Sh
rinka
ge
W
orki
ng C
apita
l Req
uire
men
ts
C
apita
l Inf
usio
ns
N
OL'
s an
d ot
her T
ax R
elat
ed
Issu
es
Assu
mpt
ions
sho
uld
be c
ompa
ny a
nd
indu
stry
spe
cific
and
may
incl
ude
37
Valc
on 2
015
• Val
uatio
n A
djus
tmen
ts o
f Cas
h Fl
ow P
roje
ctio
ns •
DiS
alva
tore
VALCON 2015
196
Prep
arer
s D
ue P
roce
ss
Di
d th
e pr
epar
er e
xerc
ise
due
prof
essi
onal
car
e:
In
tera
ct w
ith o
ther
bus
ines
s un
its, d
epar
tmen
ts,
etc.
Con
firm
key
ass
umpt
ions
with
ext
erna
l sou
rces
Con
sult w
ith o
r eng
age
an in
depe
nden
t thi
rd p
arty
to
ass
ist/re
view
C
ompa
re p
roje
cted
out
com
es w
ith p
ast a
nd
pres
ent f
inan
cial r
esul
ts ;
econ
omic;
and
indu
stry
co
nditio
ns, a
nd fu
ture
exp
ecta
tions
of in
dust
ry a
nd
anal
yst o
utlo
ok
38
Va
lcon
201
5 • V
alua
tion
Adj
ustm
ents
of C
ash
Flow
Pro
ject
ions
• D
iSal
vato
re
AmericAn BAnkruptcy institute
197
Use
r - A
sses
smen
t Pro
cess
•D
etai
led
anal
ysis
of
hist
oric
al a
nd p
roje
cted
fin
anci
al p
erfo
rman
ce
•
Asse
ssm
ent o
f cur
rent
and
fu
ture
bus
ines
s
•C
ost s
truc
ture
/ im
pact
of
rest
ruct
urin
g ef
fort
s
•As
set B
ase
•
Cap
ex
•
Wor
king
cap
ital
requ
irem
ents
•O
pera
tion
stre
ngth
s an
d w
eakn
esse
s
•Pr
oduc
t Ass
essm
ent
•
Com
petit
ive
adva
ntag
es
•
Asse
ssm
ent o
f key
re
latio
nshi
ps w
ith
cust
omer
s, v
endo
rs,
lend
ers
and
stra
tegi
c pa
rtne
rs
•
Geo
grap
hic
pres
ence
•
Pote
ntia
l buy
er u
nive
rse
•Ec
onom
ic o
utlo
ok
•
indu
stry
hea
lth
•
Fina
ncia
l mar
kets
(equ
ity,
debt
, and
val
uatio
n tr
ends
)
•R
aw m
ater
ial p
rices
•G
eopo
litic
al
•
Reg
ulat
ory
Envi
ronm
ent
Com
pany
Spe
cific
- Q
uant
itativ
e C
ompa
ny S
peci
fic -
Qua
litat
ive
Pert
inen
t Ext
erna
l Fa
cts
& C
ircum
stan
ces
39
Valc
on 2
015
• Val
uatio
n A
djus
tmen
ts o
f Cas
h Fl
ow P
roje
ctio
ns •
DiS
alva
tore
VALCON 2015
198
Usa
bility
of C
ash
Flow
Pro
ject
ions
Chec
k mat
hem
atica
l acc
urac
y
Are
assu
mpt
ions c
urre
nt a
nd co
nsist
ent th
roug
hout
Are
Proj
ectio
ns p
rese
nted
in a
thre
e pa
rt sta
tem
ent (
i.e. In
com
e St
atem
ent; B
alanc
e Sh
eet; a
nd S
tate
men
t of C
ash
Flow
)
Do P
roje
ctio
ns h
ave
adeq
uate
disc
losur
e (a
re fo
otno
tes a
nd
assu
mpt
ions c
lear)
If A
nalys
t is n
ot co
mfo
rtable
Pro
ject
ions
are
reas
onab
le, w
hat
optio
ns e
xist:
H
ave
man
agem
ent r
evis
e Pr
ojec
tions
; or
U
nila
tera
lly a
djus
t man
agem
ent's
ass
umpt
ions
and
pro
vide
do
cum
enta
tion
to s
uppo
rt su
ch a
djus
tmen
ts
40
Va
lcon
201
5 • V
alua
tion
Adj
ustm
ents
of C
ash
Flow
Pro
ject
ions
• D
iSal
vato
re
AmericAn BAnkruptcy institute
199
Test
ing
Mod
el D
evel
opm
ent
Wha
t-if A
nalys
is
Scen
ario
Ana
lysis.
(In
the
case
of a
leve
rage
d bu
y-ou
t w
here
inso
lvenc
y or
und
erca
pita
lizat
ion
is a
conc
ern
ther
e is
a ne
ed to
test
for "
Rea
sona
ble
Fore
seea
bility
" -
to a
ccou
nt fo
r diffi
cultie
s th
at a
re lik
ely
to a
rise)
Stoc
hast
ic or
pro
babi
listic
mod
elin
g
Qua
ntita
tive
tech
niqu
es s
uch
as M
onte
Car
lo
Sim
ulat
ion
can
aid
in p
repa
ring
stoc
hast
ic m
odel
s an
d te
stin
g th
e se
nsitiv
ity o
f for
ecas
t inpu
ts
41
Va
lcon
201
5 • V
alua
tion
Adj
ustm
ents
of C
ash
Flow
Pro
ject
ions
• D
iSal
vato
re
VALCON 2015
200
Cor
robo
ratio
n
Func
tion
of q
ualit
y an
d qu
antit
y of
info
rmat
ion
O
bser
ve a
mar
ket p
rice
Th
ere
may
be
anal
ysts
' co
vera
ge
An
alys
ts' p
roje
ctio
ns g
ener
ally
co
nsid
ered
less
bia
sed
than
m
anag
emen
t or o
ther
out
side
in
tere
sted
par
ties
Activ
e M
arke
t
Th
ere
is n
o ov
ersi
ght f
rom
ca
pita
l mar
kets
Con
side
rabl
e in
crea
se in
pe
rson
al ju
dgm
ent
G
reat
er re
lianc
e on
pas
t
No
Mar
ket
42
Valc
on 2
015
• Val
uatio
n A
djus
tmen
ts o
f Cas
h Fl
ow P
roje
ctio
ns •
DiS
alva
tore
AmericAn BAnkruptcy institute
201
Con
tin
gen
t A
sset
s &
Lia
bili
ties
V
alu
ati
on I
ssu
es
Jose
ph A
. DiS
alva
tore
M
anag
ing
Dir
ecto
r, F
oren
sic
and
Val
uati
on S
ervi
ces
G
rant
Tho
rnto
n
43
Valc
on 2
015
• Con
tinge
nt A
sset
s &
Lia
bilit
ies
Valu
atio
n •
DiS
alva
tore
VALCON 2015
202
Con
tinge
nt A
sset
s &
Lia
bilit
ies
Valu
atio
n Is
sues
The
valu
atio
n is
sues
aro
und
Con
tinge
nt A
sset
s an
d
Liab
ilitie
s ar
e no
t sim
ple.
How
ever
, the
re is
gui
danc
e:
B
ankr
uptc
y C
ourts
Tax
Cou
rts
O
ther
Jud
icia
l Dec
isio
ns
U
S –
GA
AP
/ IFR
S
E
cono
mic
and
Bus
ines
s Va
luat
ion
Theo
ry
44
Va
lcon
201
5 • C
ontin
gent
Ass
ets
& L
iabi
litie
s Va
luat
ion
• D
iSal
vato
re
AmericAn BAnkruptcy institute
203
Con
tinge
nt A
sset
s &
Lia
bilit
ies
- Def
ined
Con
tinge
ncy
Def
initi
on –
Ess
entia
lly,
defin
es a
con
tinge
ncy
as a
n ex
istin
g co
nditi
on, s
ituat
ion,
or s
et o
f circ
umst
ance
s in
volv
ing
unce
rtain
ty a
s to
pos
sibl
e ga
in (a
n as
set)
or lo
ss (a
liab
ility
) to
an e
nter
pris
e th
at w
ill u
ltim
atel
y be
reso
lved
whe
n ce
rtain
fu
ture
eve
nts
occu
r or f
ail t
o oc
cur.
Gai
n co
ntin
genc
ies
– po
ssib
le a
sset
s th
at a
rise
from
pas
t eve
nts
that
will
be
conf
irmed
onl
y by
the
occu
rrenc
e (o
r no
n-oc
curre
nce)
of u
ncer
tain
futu
re
even
ts n
ot w
ithin
the
cont
rol o
f the
ent
ity
Lo
ss c
ontin
genc
ies
– ar
e th
ose
that
may
re
sult
in th
e in
curre
nce
of a
liab
ility
or t
he
impa
irmen
t of a
n as
set.
US
– G
AA
P AS
C 4
50*
The
Term
"C
ontin
gent
" –
Not
def
ined
in
the
Ban
krup
tcy
Cod
e.
Auth
ority
def
inin
g "C
ontin
gent
" in
the
cont
ext o
f :
S
ectio
n 30
3 (th
resh
old
requ
irem
ents
for
chap
ter 7
and
11
invo
lunt
ary
petit
ions
)
Sec
tion
109
(e) (
debt
or e
ligib
ility
for
chap
ter 1
3 re
lief),
and
Sec
tion
502
(c) (
estim
atio
n of
cla
ims)
Cou
rts
(Ban
krup
tcy/
Tax
) C
ontin
gent
Ass
ets/
Lia
bilit
ies
* Ple
ase
refe
r to
Acc
ount
ing
Sta
ndar
ds 4
50 fo
r a m
ore
com
plet
e an
d de
taile
d di
scus
sion
.
45
Valc
on 2
015
• Con
tinge
nt A
sset
s &
Lia
bilit
ies
Valu
atio
n •
DiS
alva
tore
VALCON 2015
204
Con
tinge
nt A
sset
s &
Lia
bilit
ies
– R
ecog
nitio
n
U
S –
GA
AP
ASC
450
*
Loss
Con
tinge
ncy
Rec
ogni
tion
–
A
s a
resu
lt of
pas
t eve
nt(s
), th
e en
tity
has
an o
blig
atio
n to
oth
ers
It
is p
roba
ble
an o
utflo
w o
f cap
ital w
ill b
e re
quire
d to
set
tle th
e ob
ligat
ion
The
amou
nt c
an b
e re
liabl
y es
timat
ed
Th
e am
ount
reco
gniz
ed a
s a
prov
isio
n sh
ould
be
best
est
imat
e re
quire
d to
se
ttle
the
pres
ent o
blig
atio
n at
the
valu
atio
n da
te
Gai
n co
ntin
genc
y R
ecog
nitio
n –
A
cont
inge
ncy
that
mig
ht re
sult
in a
gai
n us
ually
sho
uld
not b
e re
flect
ed in
the
finan
cial
sta
tem
ents
bec
ause
to d
o so
m
ight
be
to re
cogn
ize
reve
nue
befo
re it
s re
aliz
atio
n
Cour
ts –
Hav
e ap
plie
d s
o ca
lled
"trig
gerin
g ev
ent"
test
In
Sum
mar
y -
A
clai
m is
con
tinge
nt a
s to
liab
ility
if
the
debt
or's
lega
l dut
y to
pay
doe
s no
t com
e in
to e
xist
ence
unt
il tri
gger
ed b
y th
e oc
curre
nce
of a
fu
ture
eve
nt a
nd s
uch
futu
re
occu
rrenc
e w
as w
ithin
the
actu
al o
r pr
esum
ed c
onte
mpl
atio
n of
the
parti
es a
t the
tim
e th
e or
igin
al
rela
tions
hip
of th
e pa
rties
was
cr
eate
d
C
ourt
s (B
ankr
uptc
y/Ta
x)
Con
tinge
nt A
sset
s/Li
abili
ties
*Ple
ase
refe
r to
Acc
ount
ing
Sta
ndar
ds 4
50 fo
r a m
ore
com
plet
e an
d de
taile
d di
scus
sion
.
46
Valc
on 2
015
• Con
tinge
nt A
sset
s &
Lia
bilit
ies
Valu
atio
n •
DiS
alva
tore
AmericAn BAnkruptcy institute
205
Con
tinge
nt A
sset
s &
Lia
bilit
ies
– Va
luat
ion
Va
luat
ion
–
Pro
visi
ons
(liab
ility)
may
be
disc
ount
ed o
nly
whe
n th
e am
ount
of
the
liabi
lity
and
the
timin
g of
the
paym
ents
are
fixe
d an
d re
liabl
y de
term
inab
le
Gai
n co
ntin
genc
ies
that
mee
t the
co
nditi
ons
for r
ecog
nitio
n sh
all b
e re
cord
ed a
t fai
r val
ue. T
he c
once
pt
of fa
ir va
lue
requ
ires
cons
ider
atio
n of
the
time
valu
e of
mon
ey
U
S –
GA
AP
ASC
450
*
Cou
rts
–
O
nce
a lia
bilit
y or
ass
et is
de
term
ined
maj
ority
of c
ourts
app
ly
"Pro
babi
lity
Dis
coun
t Rul
e"
Expe
rt m
ust:
D
eter
min
e th
e pr
obab
ility
of th
e co
ntin
genc
y m
ater
ializ
ing
(liab
ility
beco
mes
real
)
Eva
luat
e w
hat w
as k
now
n at
va
luat
ion
date
Red
uce
the
prob
abilit
y-ad
just
ed
asse
t (or
liab
ility)
to it
s ne
t pre
sent
va
lue
("N
PV
")
A
dd th
e N
PV
of c
ontin
gent
ass
et to
en
terp
rise
valu
e
C
ourt
s (B
ankr
uptc
y/Ta
x)
Con
tinge
nt A
sset
s/Li
abili
ties
*Ple
ase
refe
r to
Acc
ount
ing
Sta
ndar
ds 4
50 fo
r a m
ore
com
plet
e an
d de
taile
d di
scus
sion
.
47
Valc
on 2
015
• Con
tinge
nt A
sset
s &
Lia
bilit
ies
Valu
atio
n •
DiS
alva
tore
VALCON 2015
206
Con
tinge
nt A
sset
s &
Lia
bilit
ies
– Ex
ampl
es*
C
ontin
gent
Con
side
ratio
ns (f
rom
the
sale
of
a b
usin
ess)
Tech
nolo
gy L
itiga
tion
(Fav
orab
le a
war
ds
from
cou
rts o
r pot
entia
l set
tlem
ents
)
Gua
rant
ees
(of I
ndeb
tedn
ess,
pro
duct
lia
bilit
y, w
arra
ntie
s, ta
x ob
ligat
ions
)
Pur
chas
e C
omm
itmen
ts
Ass
ets
A
sset
Ret
irem
ent O
blig
atio
ns
E
nviro
nmen
tal O
blig
atio
ns
C
ontin
gent
Con
side
ratio
n (F
or th
e ac
quis
ition
of a
bus
ines
s)
Te
chno
logy
Liti
gatio
n
Gua
rant
ees
(of i
ndeb
tedn
ess,
pro
duct
lia
bilit
y, ta
x ob
ligat
ions
)
Unc
erta
in T
ax P
ositi
on
C
apita
l Lea
se O
blig
atio
n(s)
Pro
duct
War
rant
y
Pur
chas
e C
omm
itmen
ts
R
egul
ator
y M
atte
rs
In
adeq
uate
Insu
ranc
e C
over
age
In
adeq
uate
Ris
k M
anag
emen
t Con
trols
(i.
e. H
edgi
ng C
ontra
cts,
Fue
l, Fo
reig
n X
)
Inad
equa
te B
alan
ce S
heet
Res
erve
s
Liab
ilitie
s
* Exa
mpl
es a
re in
tend
ed to
refle
ct it
ems
that
cou
ld a
ppea
r on
an e
cono
mic
bal
ance
she
et, n
ot n
eces
saril
y a
US
-GAA
P ba
sed
bala
nce
shee
t.
48
Valc
on 2
015
• Con
tinge
nt A
sset
s &
Lia
bilit
ies
Valu
atio
n •
DiS
alva
tore
AmericAn BAnkruptcy institute
207
Valu
atio
n C
onsi
dera
tions
& A
ppro
ache
s
P
rope
r due
dilig
ence
and
doc
umen
t rev
iew
with
inte
rnal
& e
xter
nal c
ouns
el; d
iscu
ssio
ns
with
man
agem
ent,
revi
ew o
f any
inte
rnal
or
third
par
ty a
naly
sis
R
esea
rch
and
cons
ider
atio
n of
app
ropr
iate
ass
umpt
ions
Fo
rens
ic A
ccou
ntin
g (i.
e. li
kelih
ood
of G
uara
ntee
s be
ing
calle
d)
E
xpec
ted
Cos
t (i.
e. fo
r Rem
edia
tion)
C
ost o
f Ins
urin
g C
over
age
for C
ontin
genc
y
D
isco
unte
d C
ash
Flow
B
inom
ial O
ptio
n P
ricin
g M
odel
s
M
onte
Car
lo S
imul
atio
ns
A
djus
t Val
uatio
n M
ultip
les
for t
he E
nter
pris
e Va
luat
ion
– i.e
. ass
ume
the
entit
y ha
s a
Con
tinge
nt E
nviro
nmen
tal L
iabi
lity
– pe
rhap
s a
Dis
coun
t for
Lac
k of
Mar
keta
bilit
y fo
r the
en
tire
busi
ness
sho
uld
be
appl
ied
or s
elec
tion
of a
low
er th
an "n
orm
al" v
alua
tion
mul
tiple
49
Valc
on 2
015
• Con
tinge
nt A
sset
s &
Lia
bilit
ies
Valu
atio
n •
DiS
alva
tore
VALCON 2015
208
Con
tinge
nt A
sset
s &
Lia
bilit
ies
–
Impa
ct O
n En
terp
rise
Valu
e -
An
Exam
ple
Ente
rpris
e Va
lue
Assu
min
g
US-
GA
AP
Bal
ance
She
et
Ente
rpris
e Va
lue
Ass
umin
g Ec
onom
ic V
alue
of C
ontin
genc
ies
(In B
illion
s)
Ente
rpris
e Va
lue,
Inclu
ding
Cas
h 25
.0$
Pl
us:
Cont
inge
nt A
sset
s0.
0Le
ss:
Cont
inge
nt Li
abilit
ies
0.0
Adju
sted
Ent
erpr
ise V
alue
25.0
Less
:To
tal I
nter
est B
earin
g Lia
bilit
ies
20.0
Fair
Mar
ket V
alue
of T
otal
Equ
ity5.
0$
(In B
illion
s)
Ente
rpris
e Va
lue,
Inclu
ding
Cas
h 25
.0$
Pl
us:
Cont
inge
nt A
sset
s1.
0Le
ss:
Cont
inge
nt Li
abilit
ies
7.0
Adju
sted
Ent
erpr
ise V
alue
19.0
Less
:To
tal I
nter
est B
earin
g Lia
bilit
ies
20.0
Fair
Mar
ket V
alue
of T
otal
Equ
ity(1
.0)
$
50
Valc
on 2
015
• Con
tinge
nt A
sset
s &
Lia
bilit
ies
Valu
atio
n •
DiS
alva
tore
AmericAn BAnkruptcy institute
209
Fina
l Tho
ught
s
N
ever
ass
ume
you
have
all
of th
e re
leva
nt fa
cts.
Obs
ervi
ng fa
cts
for c
ontin
gent
ass
ets/
liabi
litie
s is
si
mila
r to
view
ing
an a
bstra
ct p
aint
ing,
som
etim
es y
ou ju
st d
on't
see
ever
ythi
ng th
e fir
st o
r sec
ond
time
Whe
n va
luin
g th
e en
terp
rise
of a
ban
krup
t or d
istre
ssed
bus
ines
s co
ntin
gent
ass
ets/
liabi
litie
s ar
e ex
pect
ed to
be
cons
ider
ed b
ut th
e re
cogn
ition
and
val
uatio
n of
suc
h ite
ms
may
not
be
cons
iste
nt U
S-
GAA
P
Al
way
s as
sum
e th
e co
urts
may
rule
or o
ppos
ing
coun
sel w
ill a
rgue
con
tinge
nt a
sset
/liab
ility
sho
uld
not b
e co
nsid
ered
in a
ny b
usin
ess
valu
atio
n be
caus
e su
ch m
ay in
volv
e br
oad
base
d as
sum
ptio
ns
and
unce
rtain
ties
In
ligh
t of t
he a
bove
thin
k fa
cts,
circ
umst
ance
s, a
nd q
uant
itativ
e su
ppor
t
Th
e va
luat
ion
of c
ontin
gent
ass
ets/
liabi
litie
s m
ust b
e ba
sed
on a
ll kn
own
varia
bles
at t
he v
alua
tion
date
. One
sho
uld
not b
e re
luct
ant t
o ac
know
ledg
e th
e re
al v
alue
of t
he c
ontin
gent
ass
et/li
abili
ty w
ill
not b
ecom
e kn
own
or fa
ct u
ntil
the
actu
al o
ccur
renc
e of
a fu
ture
eve
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