Liquidation value is the amount of money that could be realized if an asset or a group of assets (e.g., a firm) is sold separately from its operating organization. This value is in marked contrast to the going-concern value of a firm, which is the amount the firm could be sold for as a continuing operating business. These two values are rarely equal, and sometimes a company is actually worth more dead than alive.
The security valuation models that we will discuss in this chapter will generally assume that we are dealing with going concerns - operating firms able to generate positive cash flows to security investors. In instances where this assumption is not appropriate (e.g., impending bankruptcy), the firm's liquidation value will have a major role in determining the value of the firm's financial securities.