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I want to come up with an estimate for where the share price of a company may end up in a bankruptcy/event of default. What is a commonly-used rule of thumb for this? I know it will vary greatly from one company's capital structure to another, but what is a quick first approximation using debt, EBITDA, book value, or other metrics, etc?

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Generally "default" means that the company cannot pay off their debts, and since debt holders get paid before equity holders, their equity would be effectively worthless.

That said, companies can emerge from Chapter 11 bankruptcy (reorganization) and retain equity value, but it is rare. Most times, stocks are de-listed or frozen on stock exchanges, and company's reorganization plan will cancel all existing equity shares, instead focusing all of their attention on paying back as much debt as possible. If the company issues new equity after reorganizing, it might provide a way for holders of the original equity to exchange their shares for the new equity, but it is rare, and the value is usually significantly less that the value of the original equity.

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  • For bonds a common rule of thumb is 35-40% recovery. I'm trying to find out if there's an equivalent "equity recovery rate" that works a reasonable amount of time. Are you saying there generally isn't one? – trade_the_basis Nov 13 '17 at 17:31
  • Equity is last in line, so if there aren't sufficient assets to satisfy the debt, the stock holders get nothing. – zeta-band Nov 13 '17 at 18:08
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    @trade_the_basis No I'm saying the rule of thumb is that equity has no value in bankruptcy. There are exceptions, but they're on a case-by-case basis. – D Stanley Nov 13 '17 at 18:09
  • @trade_the_basis see the cautionary tale of Lehman Brothers - 93% estimated losses on the equity value. This is their 2007 form 10-k – Mindwin Nov 13 '17 at 18:14
  • @Mindwin That was just after the bankruptcy filing, which many saw coming. Their stock had dropped 73% from its high before that, and the stock eventually became worthless. – D Stanley Nov 13 '17 at 19:30

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