Explain the reasons why conventional methods are not usefully deployed when valuing companies in distress? OR Explain the various actions of the…

Conventional methods are not usefully deployed when valuing companies in distress as: • Discounted cashflow valuation method required terminal value calculation which is based upon an infinite life and ever-growing cashflows. However, the assumption of perpetuity of cash flows may not be relevant in case of distressed firm because of negative cash flows. • A distressed firm generally has negative and declining revenues hence expects to lose money for some more time in the future. For such firms, estimating cash flows is difficult, since there is a high risk of bankruptcy. For firms expected to fail, DCF does not work very well, since DCF values a firm as a going concern – even if the firm is expected to survive, projections have to be made until the cash flows turn positive, else the DCF would yield a negative value for equity or firm. • Discount rates used in conventional methods reflect companies which are operationally as well as financially sound. They have to be adjusted for the probabilities of failures of the companies to be used in case of distressed companies. OR From the following actions by the Governments of the host country this risk can be identified: 1. Insistence on resident investors or labour. 2. Restriction on conversion of currency. 3. Expropriation of foreign assets by the local govt. 4. Price fixation of the products. Since this risk mainly relates to investments in foreign country, company should assess country risk. (1) By referring political ranking published by different business magazines. (2) By evaluating country's macro-economic conditions. (3) By analysing the popularity of current government and assess their stability. (4) By taking advises from the embassies of the home country in the host countries.