Going Distress on the WACC

Abstract

WACC has traditionally been used as a measure of the cost of capital for companies and as a discount rate of the future company's cash flows for valuation purposes. The WACC, especially for distressed companies, can play a key role in determining the efficiency of the restructuring framework for companies heading into bankruptcy. The theory and the practice show that companies that file for Chapter 11 have a higher probability of rehabilitation as a going concern and boost the recovery of the stakeholders as a whole than more credit friendly restructuring frameworks. Additionally, rehabilitated companies from more debtor friendly proceedings that have undergone a profound restructuring through efficient tools should also enjoy a higher probability of survival. In the first part of the thesis, we aim to prove that empirically by thoroughly looking at the market based WACC of a sample of American and European companies one year before and after the filing date. If we meet with success, then we should be confident that the WACC could result in a powerful tool to evaluate the efficiency of the restructuring framework of the company's filing. This paper is the first one of a series of papers that form my thesis for the phd in Finance