CIRA: Financial Advisory and Valuation

Financial Advisory and Valuation tests how advisers value a distressed enterprise, test solvency, allocate value across claims, and assess whether a plan or financing is fair and feasible. Expect DCF and market approaches, liquidation versus going-concern analysis, claim waterfalls, adequate protection, and fraudulent-transfer economics.

Core methods

• Income approach: project free cash flow, discount at WACC, and add a terminal value; in distress, stress-test projections and use a higher discount rate or scenario weighting.
• Market approach: comparable companies and precedent transactions; adjust for size, leverage, liquidity, and distressed multiples.
• Asset approach: orderly liquidation or forced liquidation value; going-concern value is generally preferred if the business can be stabilized.
• Valuation must reconcile enterprise value to equity value: subtract net debt and other claims, and avoid double-counting cash.
• Claims waterfall follows priority: DIP and superpriority, secured claims to collateral value, administrative and priority claims, general unsecured, then equity. Absolute priority governs cramdown.
• Solvency tests include balance-sheet insolvency (liabilities exceed assets at fair value), equitable insolvency (inability to pay debts as due), and adequate capitalization; fraudulent-transfer analysis asks whether reasonably equivalent value was received.

Worked example

Assume going-concern enterprise value of $45 million, no excess cash, a $5 million superpriority DIP claim, $30 million secured debt, $7 million administrative and priority claims, and $20 million general unsecured claims. The waterfall pays DIP $5 million, secured $30 million, and administrative and priority $7 million, leaving $3 million for unsecured claims-a 15% recovery. Equity receives nothing. If the secured claim were undersecured, the deficiency would join the general unsecured class.

Traps

Do not confuse enterprise value with equity value. Do not add cash to EV and then subtract it again. Do not use management’s unadjusted projections as the only scenario. Terminal value can dominate a DCF; sensitivity-test it. Liquidation value is not always a floor, and distressed WACC inputs are judgmental. Do not pay junior claims before senior claims without consent or a valid equitable-mootness or subordination analysis.