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We investigate the importance of bankruptcy risk in discounted cash flow (DCF) equity valuation. Our analyses first show how bankruptcy risk is incorporated in DCF valuation, where investment risk is captured by cash flow certainty equivalents. Within this general setting, we find that bankruptcy risk can be captured by discounting factors incorporating period-specific bankruptcy probabilities, allowing the numerators in a DCF valuation model to follow a binary random walk. Elaborating a model of this kind, we assess the value of the equity holders' limited liability right (the equity holders' right to hand over the firm to its creditors if bankruptcy occurs). Two valuation models commonly used in academic research and professional practice—the Dividend Discount Model (DDM) and the Residual Income Valuation (RIV) model—are addressed specifically. Our analyses show that bankruptcy probabilities are important for the estimation of the value drivers in both models. Even if bankruptcy probabilities are as low as 0.02, equity values might be severely exaggerated if bankruptcy risk is ignored in DDM or RIV. In particular, this holds for firms expected to have high future growth (conditioned on firm survival). For the RIV model to properly capture bankruptcy risk, we identify "bankruptcy event accounting principles" and an additional term that must be included in the model. We also show that bankruptcy risk under certain conditions can be handled through a specific calibration of the discounting rate/-s in all DCF models, allowing the value drivers—i.e., future dividends or residual income—to be forecasted conditioned on firm survival. [ABSTRACT FROM AUTHOR]

Purpose: The purpose of this paper is to present a model to value leveraged firms in the presence of default risk and bankruptcy costs under a flexible firm's debt structure. Design/methodology/approach: The authors assume that the total debt of the firm is a combination of two debt components. The first component is an active debt component which is assumed to be proportional to the firm's value. The second one is a passive predetermined risk-free debt component. The combination of the two debt categories makes the firm's capital structure more realistic and allows us to include flexibility into the firm's debt structure management. The firm's valuation is performed using the discounted cash flow technique based on the weighted average cost of capital (WACC) method. Findings: The model can be used to define active debt management strategies that can induce the firm to deviate from its capital structure target in order to preserve debt capacity for future funding needs. The firm's valuation is performed by using the WACC method and a closed form valuation formula is provided. Such a formula can be used to value costs and benefits of financial flexibility. Research limitations/implications: The proposed approach provides a good compromise between mathematical complexity and model capability of interpreting the various economic and financial aspects involved in the firm's debt structure puzzle. Practical implications: This model offers a realistic approach to practical applications where real financing decisions are characterized by a simultaneous use of these two debt categories. By comparing costs and benefits deriving from using unused debt capacity for future funding needs, the model provides a quantitative support to investigate if financial flexibility can add value to firms. Originality/value: To the authors knowledge, the approach the authors propose is the first attempt to build a valuation scheme that accounts for firm's financial flexibility under default risky debt and bankruptcy costs. Including financial flexibility, this model fills an important gap in the literature on this topic. [ABSTRACT FROM AUTHOR]

An increasing number of professional sports teams have declared bankruptcy in recent years. Although no bankruptcy court has yet been required to value a bankrupt sports team as an enterprise, it is only a matter of time before such a judicial valuation will be necessary. In this Article, Paul M. Lopez, K.M. Lewis, and Judge D.M. Lynn explain the challenges of valuing a professional sports franchise in bankruptcy, and offer judges and practitioners guidance in undertaking this difficult task. [ABSTRACT FROM AUTHOR]

The article focuses on valuation hearing requirements in U.S. bankruptcy courts. Topics include value mortgage portfolios, discounted cash flow (DCF) analysis, and debtor rehabilitation after the filing of bankruptcy protection. Information is provided on the U.S. housing market between 2006 and 2012 and collateralized residential mortgage-backed securities (CRMBS).