Brattle principals Yvette Austin Smith and Evan Cohen recently co-authored an article on bankruptcy valuation techniques in response to a July 2, 2014 U.S. Bankruptcy Court opinion in the Genco Shipping valuation trial. The article, “Asset Value Trumps Discounted Cash Flow in Another Bankruptcy Valuation Dispute,” provides an expert overview of the court’s ruling in this case, which rejected the discounted cash flow method (DCF) as a way to value the dry bulk shipping company, and instead concluded that net asset value (NAV) was a better indication of value in this instance.
Ms. Austin Smith and Mr. Cohen explain that DCF is the more commonly used method in valuation, but it can be a less reliable indication of value for a business with heavy fixed assets and uncertain future cash flows — especially when a business is in financial distress. Furthermore, the authors caution valuation experts, and the attorneys who retain them, against the natural tendencies to over-emphasize DCF and under-emphasize NAV when valuing a business.
The article can be downloaded below.