TABLE OF CONTENTS This chapter gives credit professionals the financial tools and methodology that helps determine equity value, distance to default, default probabilities, and loan value. [1.] Market values validate projections, identify leveraged buyout and restructuring opportunities, and determine values in partnership buyout agreements. Bear in mind that market value, more so than book value, defines loan value: an obligor s asset value, (asset) volatility, and financial obligations link directly to distance to default and default frequencies. [2.] We can decide market values and volatility of privately owned firms employing the Corporate Valuation Model [3.] in the Modeling Toolkit. Our valuation model is used for developing financial statements, enterprise value, equity values, value gaps, volatility, default probabilities, earnings per share, economic profit, and other financial metrics.
Value is composed of future cash flow potential and risks (threats) to those cash flows. These perceived risks or threats define market value of assets (before adjustments), asset volatility, equity values, distance to default, and default probabilities. Bankers looking beyond risk to business development opportunities will use valuation techniques to determine value gaps (difference between the market stock price and the stock s unrealized value).
[1.] Internal audits of the credit risk processes should be conducted on a periodic basis to determine that credit activities are in compliance with the bank s credit policies and procedures, that credits are authorized within the guidelines established by the bank s board of directors, and that the existence, quality, and value of individual credits are accurately being reported to...
