Valuation Approaches

FZVE - Guillermo Ramirez

September 2019

UNIVERSIDAD DE PIURA
Valuation Approaches

Some valuation approaches

• It focuses on the value of existing assets

Liquidation and • It departs from book value or other
accounting valuation accounting estimates of value (e.g., useful life
of non-current assets)

• It relates the value of a company with the

present value of its future cash flows:
Discounted cash flow • DCF to equity
(DCF)
• DCF to the firm (WACC)
• Adjusted present value model (APV)

• It gives us an estimate of firm value based on

the market value of similar companies -
Relative valuation comparable firms, which are chosen based
upon common characteristics: earnings, book
value, sales, etc.
Valuation Approaches

Liquidation and accounting valuation

Accounting value

 The main reason for us to employ accounting information is that we do

not live in a frictionless world

 Income statement (also known as P&L statement) offers

information on what could be the potential profits of the firm
 Balance sheet provides us of accounting estimates of equity, and
more generally speaking asset values
Valuation Approaches

Liquidation and accounting valuation

Accounting value

 The following equity valuation model stems from Ohlson (1995) y

Feltham and Ohlson (1995) and is based on book value and earnings:
∞
𝐸(𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠𝑡 )
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = ෍
(1 + 𝑘𝑒 )𝑡
𝑡=1

Knowing that:

1. 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡 = 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1 + 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑡 − 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠𝑡

2. 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑝𝑟𝑜𝑓𝑖𝑡𝑡 = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑡 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1

Valuation Approaches

Liquidation and accounting valuation

Accounting value

We could define dividends as:

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠𝑡 = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑡 + 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1 − 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠𝑡 = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑡 + 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1 − 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡 +

𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠𝑡 = 1 + 𝑘𝑒 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1 − 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡 + (𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑡 −

𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1 )

Thus, if t=1:

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠1 = 1 + 𝑘𝑒 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦0 − 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦1 + (𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒1 −

𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦0 )
Valuation Approaches

Liquidation and accounting valuation

Accounting value

And

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
1 + 𝑘𝑒 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦0 − 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦1 + (𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒1 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦0 )
=
(1 + 𝑘𝑒 )1
1 + 𝑘𝑒 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦1 − 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦2 + (𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒2 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦1 )
+
(1 + 𝑘𝑒 )2
1 + 𝑘𝑒 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦2 − 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦3 + (𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒3 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦2 )
+ +
(1 + 𝑘𝑒 )3
∞
1 + 𝑘𝑒 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1 − 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡 + (𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑡 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1 )
෍
(1 + 𝑘𝑒 )𝑡
𝑡=4
Valuation Approaches

Liquidation and accounting valuation

Accounting value

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦1 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒1 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦0
= 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦0 − +
1 + 𝑘𝑒 1 1 + 𝑘𝑒 1
1 + 𝑘𝑒 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦1 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦2 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒2 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦1
+ − +
1 + 𝑘𝑒 2 1 + 𝑘𝑒 2 1 + 𝑘𝑒 2
(1 + 𝑘𝑒 )𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦2 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦3 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒3 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦2
+ − + +
(1 + 𝑘𝑒 )3 1 + 𝑘𝑒 3 1 + 𝑘𝑒 3
∞
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑡 + 1 + 𝑘𝑒 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1 − 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1
෍
(1 + 𝑘𝑒 )𝑡
𝑡=3

∞
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑡 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦0 + ෍
(1 + 𝑘𝑒 )𝑡
𝑡=1
Valuation Approaches

Liquidation and accounting valuation

Accounting value

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦1 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒1 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦0 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦1
= 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦0 − + +
1 + 𝑘𝑒 1 1 + 𝑘𝑒 1 1 + 𝑘𝑒 1
𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦2 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒2 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦1 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦2 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦3
− + + −
1 + 𝑘𝑒 2 1 + 𝑘𝑒 2 (1 + 𝑘𝑒 )2 1 + 𝑘𝑒 3
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒3 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦2
+ +
1 + 𝑘𝑒 3
∞
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑡 + 1 + 𝑘𝑒 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1 − 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1
෍
(1 + 𝑘𝑒 )𝑡
𝑡=3

∞
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑡 − 𝑘𝑒 ∗ 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦𝑡−1
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝐵𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦0 + ෍
(1 + 𝑘𝑒 )𝑡
𝑡=1
Valuation Approaches

Liquidation and accounting valuation

Accounting value

 Book value is often use as a proxy for the firm value

 For instance, we say an stock is undervalued if the market
value of equity is lower than its book value

 There exists empirical evidence that shows that stocks with high book-
to-market ratios exhibit higher returns than the rest of the market
(e.g., Fama and French, 1992)
Valuation Approaches

Liquidation and accounting valuation

Accounting value

BE/ME portfolios
Average annual
1958-2018 BE/ME Std. Dev. (%)
returns (%)
Low BE/ME 0.19 11.12 20.42
Decile 2 0.34 12.06 17.58
Decile 3 0.46 12.37 16.76
Decile 4 0.57 11.83 17.48
Decile 5 0.67 12.48 17.52
Decile 6 0.79 13.42 16.09
Decile 7 0.92 12.77 19.09
Decile 8 1.08 14.70 19.74
Decile 9 1.33 16.29 20.81
High BE/ME 2.13 16.80 24.53
Source: Data on sorted protfolios were obtained from Kenneth French’s website
(http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html)

Value Premium: 5.68%

Valuation Approaches

Liquidation and accounting valuation

Accounting value

Question:
Do you think book value could always serve as a good proxy for firm value?
Valuation Approaches

Liquidation and accounting valuation

Accounting value

Do you think book value could always serve as a good proxy for firm value?
Not necessarily, it is a good proxy for firm value as long as we are talking
about a mature firm, with a large portion of fixed assets and with little
growth opportunities.
Valuation Approaches

Liquidation and accounting valuation

Liquidation value

 This is a particular case from accounting valuation. It assumes that assets

must be sold right away.

 The relation between liquidation value and book value is straight forward.
Liquidation value tends to be a percentage of the book value (e.g., Berger et
al., 1996)

 However, liquidation value tends to differ from the value that can be
estimated through DCF approach. Assets liquidation implies a value
discount

 The difference is even bigger when it comes to growth firms, as

liquidation value does not capture the value associated with
future investment opportunities
Valuation Approaches

Liquidation and accounting valuation

Source: Damodaran, Aswath (Foundations and Trends in Finance, 2007)

Valuation Approaches

Liquidation and accounting valuation

 Valuing a firm as a group of assets is not the same as valuing a firm

as a going concern, that is as something that is supposed to have
sufficient resources to meet future financial obligations and continue
operating indefinitely
Valuation Approaches

DCFE

Dividend discount model (DDM)

 First, we will assume that the cash flow to shareholders will just come in
the form of dividends

 When an investor buys shares of a publicly traded firm and hold them as
part of his investment portfolio, he expects to get in the following period
some dividends and the expected value of such stock:

𝐸 𝑑𝑡+1 + 𝑝𝑡+1
Valuation Approaches

DCFE
Dividend discount model (DDM)

Thus, the price of a stock can be written as:

𝐸 𝑑𝑡+1 + 𝑝𝑡+1
𝑝𝑡 =
(1 + 𝑘𝑒 )

𝐸 𝑑𝑡+1 𝐸 𝑝𝑡+1
𝑝𝑡 = +
(1 + 𝑘𝑒 ) (1 + 𝑘𝑒 )

𝐸 𝑑𝑡+1 1 𝐸 𝑑𝑡+2 + 𝑝𝑡+2

𝑝𝑡 = +
(1 + 𝑘𝑒 ) (1 + 𝑘𝑒 ) (1 + 𝑘𝑒 )

𝐸 𝑑𝑡+1 𝐸 𝑑𝑡+2 𝐸 𝑝𝑡+2

𝑝𝑡 = + +
(1 + 𝑘𝑒 ) (1 + 𝑘𝑒 )2 (1 + 𝑘𝑒 )2
∞
𝐸 𝑑𝑡
𝑝0 = ෍
(1 + 𝑘𝑒 )𝑡
𝑡=1
Valuation Approaches

DCFE

Dividend discount model (DDM)

Inputs:

 𝐸 𝑑𝑡 : Expected dividends, we need to make some assumptions in terms of

the dividend growth rate and the payout policy of the firm

 𝑘𝑒 : It can be obtained from an asset pricing model (e.g., CAPM).

Valuation Approaches

DCFE

Dividend discount model (DDM)

 Gordon growth model

Let’s assume we are analyzing a stable firm, and that the dividend growth
rate is stable too (𝑔𝑛 ), then:

𝐸 𝑑1
𝑝0 =
𝑘𝑒 − 𝑔𝑛

𝑑0 (1 + 𝑔𝑛 )
𝑝0 =
𝑘𝑒 − 𝑔𝑛
Valuation Approaches

DCFE

Dividend discount model (DDM)

Caveats: (i) 𝑔𝑛 cannot be greater than the economy growth rate and (ii) other
performance measures must also grow at similar a rate as dividends (e.g.,
earnings)

 If Dividend growth rate > Earnings growth rate

Dividends will be greater than earnings

 If Dividend growth rate < Earnings growth rate

We will be implicitly assuming that the payout rate will tend to zero over
time
Valuation Approaches

DCFE

Dividend discount model (DDM)

 Adding flexibility: A 2 stage model

We assume that dividends grow at different rates in the first stage until they
reach their long-term growth rate (stability)

𝐸 𝑑𝑡 1 𝐸 𝑑𝑇+1
𝑝0 = σ𝑇𝑡=1 + ∗
(1+𝑘𝑒 )𝑡 (1+𝑘𝑒 )𝑇 𝑘𝑒 −𝑔𝑛

T: It denotes the point in time where stage 1 ends

Valuation Approaches

DCFE

Dividend discount model (DDM)

Comments:

 This model is not used very often as it provides more conservative

estimates of value and is only based on dividends

 But, it is still useful:

 Could be used as a benchmark for firms whose cash flows exceed their
dividends

 Good for firms that distribute cash flows to shareholders by means of

dividends

 Good for firms in industries where the computation of cash flows

might be somewhat complex (e.g., financial industry)
Valuation Approaches

DCFE
DCFE

 We now replace dividends by the FCFE

 DCFE implicitly assumes that FCFE will be entirely distributed among

shareholders. Hence:

 After debt is repaid and reinvestment need are covered each period, all
the remaining cash flow will go to the shareholders

 The model assumes there is good corporate governance, even if the

FCFE is not distributed. Shareholders can make sure that the CEO
will not waste the money that is not distributed among shareholders
Valuation Approaches

DCFE

DCFE

Net Income [EBIT(1-t) - Interest expense (1-t)]

+ Depreciation and amortization (D&A)
- Capital expenditure (CAPEX)
Shareholders - Change in working capital (△WK) Cost of equity
+ New debt (issuance)
- Debt repaid
FCFE

∞
𝑬[𝑭𝑪𝑭𝑬𝒕 ]
𝑽𝑬 = ෍
𝟏 + 𝒌𝒆 𝒕
𝒕=𝟏
Valuation Approaches

DCFF

WACC approach

EBIT(1-t)
+ Depreciation and amortization (D&A)
Firm - Capital expenditure (CAPEX) WACC
- Change in working capital (△WK)
FCFE
∞
𝐸[𝐹𝐶𝐹𝐹𝑡 ]
𝑉𝐹 = ෍ 𝑡
1 + 𝑊𝐴𝐶𝐶
𝑡=1

 Notice that in the formula above, we would be implicitly assuming that

WACC is constant over time, this assumption only holds if the D/E ratio
remains constant over time. If capital structure changes at some point in
time WACC will change too
Valuation Approaches

DCFF

WACC approach

 If we assume that there exists one stage of higher growth until the firm
reaches its mature stage, and then the firm starts growing at a constant
rate 𝑔𝑛 :

𝑇
𝐸[𝐹𝐶𝐹𝐹𝑡 ] 1 𝐸 𝐹𝐶𝐹𝐹𝑇+1
𝑉𝐹 = ෍ + ∗
(1 + 𝑊𝐴𝐶𝐶)𝑡 (1 + 𝑊𝐴𝐶𝐶)𝑇 𝑊𝐴𝐶𝐶 − 𝑔𝑛
𝑡=1
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒

Where 𝐸 𝐹𝐶𝐹𝐹𝑇+1 =𝐸 𝐹𝐶𝐹𝐹𝑇 *(1+𝑔𝑛 )

Note: T will typically be equal to 10 years when we do valuation

Valuation Approaches

DCFF

WACC approach

 What if the firm has excess cash or other assets that do not correspond to
its operations?
Valuation Approaches

DCFF

WACC approach

 What if the firm has excess cash or other assets that do not correspond to
its operations?

 Then what we are actually calculating is the enterprise value, and we

would need to add the value of non-operating assets (e.g., excess cash,
marketable securities) cross holdings and others assets held by the
firm to obtain the value of the firm

 After subtracting all the non-residual claims (debt, unfunded health

care obligations, etc.) from the firm value we would get the equity
value
Valuation Approaches

DCFF
DCFF vs DCFE

 DCFF advantages:
 Debt related cash flows are not explicitly considered, as FCFF is
before debt
 If the firm’s leverage significantly changes over time, DCFF could be
very useful (no need to calculate new debt issuances and debt
repayments), however DCFF require from us to estimate leverage
ratios and cost of debt for the WACC calculation

 Is the equity value obtained from the DCFF equal to the equity value
obtained through DCFE?
 In theory, FCFF and FCFE should lead to the same equity value if
debt related assumptions are consistent. However, in practice, the
outcomes from these two approaches hardly converge to each other.
Valuation Approaches

APV

Adjusted present value (APV)

 It separates the value that comes from the operations of the firm and the
one that stems from external financing through debt

𝑉𝐿 = 𝑉𝑈 + 𝑃𝑉 𝑡𝑎𝑥 𝑠ℎ𝑖𝑒𝑙𝑑 − 𝑃𝑉(𝑏𝑎𝑛𝑘𝑟𝑢𝑝𝑡𝑐𝑦 𝑐𝑜𝑠𝑡𝑠)

𝑉𝐿 and 𝑉𝑈 are the values of the levered and the unlevered firm
Valuation Approaches

APV

Adjusted present value (APV)

 First component:
𝑽𝑼 : We just need to calculate the PV of future cash flows of the unlevered
firm using a discount rate that goes in accordance. Using the CAPM model:
𝜌𝑢 = 𝑟𝑓 + 𝛽𝑢 (𝑅𝑚 − 𝑟𝑓)

If we assumed that cash flows grow at a constant rate (𝑔𝑛 ) in perpetuity,

then:

𝐹𝐶𝐹𝐹(1 + 𝑔𝑛 )
𝑉𝑈 =
𝜌𝑢 − 𝑔𝑛
Valuation Approaches

APV

Adjusted present value (APV)

 Second component:
PV 𝒕𝒂𝒙 𝒔𝒉𝒊𝒆𝒍𝒅 : Since tax shield stems from debt, it should be discounted
using the cost of debt:

𝑡 ∗ 𝑘𝑑 ∗ 𝐷𝑒𝑢𝑑𝑎
𝑉𝑒𝑠𝑐𝑢𝑑𝑜 𝑓𝑖𝑠𝑐𝑎𝑙 =
𝑘𝑑

𝑉𝑒𝑠𝑐𝑢𝑑𝑜 𝑓𝑖𝑠𝑐𝑎𝑙 = 𝑡 ∗ 𝐷𝑒𝑢𝑑𝑎

Valuation Approaches

APV

Adjusted present value (APV)

 Third component:

PV(𝒃𝒂𝒏𝒌𝒓𝒖𝒑𝒕𝒄𝒚 𝒄𝒐𝒔𝒕𝒔): The most difficult one to be estimated

PV 𝒃𝒂𝒏𝒌𝒓𝒖𝒑𝒕𝒄𝒚 𝒄𝒐𝒔𝒕𝒔 = 𝑃𝑟𝑜𝑏. 𝑜𝑓 𝑑𝑒𝑓𝑎𝑢𝑙𝑡 ∗ 𝑏𝑎𝑛𝑘𝑟𝑢𝑝𝑡𝑐𝑦 𝑐𝑜𝑠𝑡𝑠

Probability of default could be estimated using a probit or logit model

(regressions are needed once again) or we could just use the default probability
of a bond that corresponds to the rating of one bond issued by the firm of our
interest

On the other hand, bankruptcy costs are said to be between 25% and 30% of a
firm value, bu there is not robust evidence for that