Session 13: Loose Ends - Distress, Dilution and Illiquidity

Look at how best to incorporate the effects of distress, dilution and ill liquidity into the value per share for a company

[alex_]

Dear Aswath, this is a perfect lecture. I love it, and I am ready to watch it again and again.
I just wanted to suggest that the formula on the slide at 6:00 doesn't seem to take into account the recovery rate. If one assumes the recovered sum to be 2, 769M (as suggested on the slide) and constant during the next 7 years, and the amount of debt to be 7, 565M (as suggested on the previous slide), the formula could be improved to

529 = 63.5×(1−p)/1.03 + 63.5×((1−p)^2)/(1.03^2) + 63.5×((1−p)^3)/(1.03^3) + 63.5×((1−p)^4)/(1.03^4) + 63.5×((1−p)^5)/(1.03^5) + 63.5×((1−p)^6)/(1.03^6)+ 63.5×((1−p)^7)/(1.03^7) + 1000×((1−p)^7)/(1.03^7) + (1000×2769/7565)×p/1.03 + + + + + +

I solved this equation in Wolfram Mathematica, and got the annual default rate of 27.13% (i.e., very close to what S&P B+ grade implies). The higher default rate is balanced by the recovery rate, so that we still get the bond price of 529. But since, to the going concern, only the probability of default seems relevant, this higher default risk estimate can potentially improve the equity valuation.

I also solved this equation with the assumed annual default rate of 28.25% (of S&P B+ grade) for the risk-free rate, and got the risk-free rate estimate of 2.38%.

[karanarora]

Great video! Helpful to students who are unable to take University Finance classes (yet!)

[harshpanchal]

what if the company does not have bonds outstanding, is there some other way

[dompatrick]

Dear Professor Damodaran, I have your Investment Valuation textbook. Which chapters would you say best corresponds to the content taught here?

[RoyReyes]

Amazon stock is down -50% Sir . whats happening