> ## Documentation Index
> Fetch the complete documentation index at: https://valuation-101.com/docs/llms.txt
> Use this file to discover all available pages before exploring further.

# Failure Rate

> Estimate the probability of corporate failure and adjust the intrinsic value accordingly.

## 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)`.

## 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.