Munich Personal RePEc Archive

The Undervaluation of Distressed Company's Equity

Schmidt, Frederik (2009): The Undervaluation of Distressed Company's Equity.

There is a more recent version of this item available.
[thumbnail of MPRA_paper_13341.pdf]

Download (100kB) | Preview


In a simple firm value model we consider the impact of the insolvency probability on the valuation of equity and debt, which are assumed to be not publicly traded. For the case of a distressed company, which usually has high debt and low equity, we can show that the impact becomes increasingly important. Disregarding this yields an overvaluation of debt and an undervaluation of equity. We calculate the sensitivity of equity with regard to debt, which is isomorphic to the sensitivity of a call option with regard to the strike price, and show that this sensitivity rises with increasing debt. Furthermore, we provide a numerical example of this effect.

Available Versions of this Item

Atom RSS 1.0 RSS 2.0

Contact us: mpra@ub.uni-muenchen.de

This repository has been built using EPrints software.

MPRA is a RePEc service hosted by Logo of the University Library LMU Munich.