Hello, again. Back for another exciting edition of Mike Talkin, I will try not to disappoint. No promises though. The topic du jour is the basic valuation model and what happens when the variables are manipulated. The formula is as follows:
∞
∑ (E[NetCashFlow@t]/(1+r)^t) – Bankruptcy Costs
t=1

Bankruptcy costs include paying collection costs for lenders, numerous court costs, and having to pay everyone you can among other things. These costs are affected by the probability of going bankrupt. With proper risk management and insurance, these costs will decrease. This alone will increase the value of the firm, but lower bankruptcy costs also allow the firm to receive a better interest rate. The lower the interest, the more valuable a firm will be. This inverse relationship also implies that with a higher interest rate, the value of the firm will decrease.