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What it does

Estimates the probability that the company will fail (go bankrupt) before the projected cash flows materialize. The DCF value is then adjusted: Adjusted value = DCF value × (1 − failure probability).

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Two methods

Bond-rating-based: Uses historical default rates by bond rating from Damodaran’s dataset. If the company has a bond rating (or synthetic rating from the cost-of-capital skill), the historical 10-year cumulative default rate for that rating class is used. Age-based: Uses Bureau of Labor Statistics (BLS) business survival data. Younger companies have higher failure rates. Used when no bond rating is available.