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How do you fair maket value debt that is converting to equity post a bankruptcy? Meaning, the senior lenders are goign to have all of the equity post restructuring and you're trying to figure out the value of the equity day 1 of chapter 11 emergence...
Here's what I know so far..
(1) You use a discounted cash flow method
(2) You use the capital structure post restructure
Here's my fundamental question...
(1) the discount rate to use to discount future projected cash flows. how do you figure it out? I understand the debt component of WACC but specifically the equity....
CAPM... this becomes so much more of a factor in WACC of a distressed, Ch. 11 company.. I assume the equity is much more of a component to the total capital structure.. how do you figure weight the equity in WACC? meaning Equity as a % of total capital.... Secondly, do you use a typical CAPM formula? say the answer comes out to 11%.. Does that even make sense given that it's a distressed company that just emerged from bankruptcy? shouldn't CAPM be 20-25%? A required return of an equity investor on their equity? I guess the equity portion of WACC is very confusing. Please advise. Read More