Default risk implication in company valuation

Bondareva Kristina

The DCF method assumes the unconditional existence of tax shields throughout the entire forecast period in the absence of a default risk, which does not correspond to the reality. This article proposes an improvement in the WACC calculation formula, which considers such debt drawbacks as the default risk and bankruptcy costs. This is particularly relevant when evaluating companies that are in a pre-bankrupt state.

Keywords:valuation; bankruptcy; default risk; default probability; bankruptcy costs; WACC.