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036A target company faces a lawsuit: a 30% chance it must pay Rs 200 crore in damages in 2 years, otherwise nothing. At a 10% discount rate, how much should the price come down? What would you negotiate instead of a price cut?Probability and expected value in dealsCoreAres ManagementLondon · 2025
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What is the lawsuit worth in today's money?
Show the worked solution
About Rs 49.6 crore off the price, but a cut is the weaker fix. Expected damages are 30% x 200 = Rs 60 crore, payable in two years, so 60 / 1.1^2 is Rs 49.6 crore today. A price cut is fair on average yet leaves you Rs 200 crore exposed if the case is lost. A specific indemnity from the seller backed by an escrow moves the bad branch to the seller instead.
How do you put a number on something that may never happen?
A shopkeeper who knows that 3 in 10 customers return a gadget within the warranty sets aside money for returns before counting profit. A contingent liability is priced as chance times cost, then discounted for time: here 0.3 x 200 = Rs 60 crore, and two years at 10% brings it to Rs 49.6 crore. That is the average cost across all the ways the case could end, in today's money.
A 30% chance of paying Rs 200 crore in two years is worth Rs 60 crore on average and Rs 49.6 crore today at 10%, which is the fair price cut, yet on the losing branch the buyer still owes Rs 165.3 crore in today's money.
The relationship
$PV = \frac{p \times D}{(1+r)^t} = \frac{0.3 \times 200}{1.1^2} \approx 49.6$
p the chance of losing, 30%
D damages if lost, Rs 200 crore
r the discount rate, 10%
t years until payment, 2
What it says in wordsThe value of a possible future payment is its chance times its size, discounted back to today.
Why is a price cut not the best answer?
Because a buyer does not live the average; it lives one branch. Cut the price by 49.6 and lose the case, and you have paid for a Rs 200 crore liability with a Rs 49.6 crore discount. A specific indemnityA promise by the seller to reimburse the buyer for one named liability, here the lawsuit, if it costs money after completion. puts the bad branch back with the seller, who knows the case best. Backing it with an escrow, part of the price held back until the case ends, makes sure the money is there to collect.
Say the trade-offs. Sellers dislike escrows because cash is locked up, so expect to give something back, perhaps a smaller cut or a cap on the indemnity. Warranty and indemnity insurance usually excludes known issues like this one, so check the policy before relying on it. And the 30% is itself an estimate: ask the legal team how they reached it, because the answer moves one for one with it.
Where candidates lose it
The common loss is taking the full Rs 200 crore off the price, which overpays for caution and usually kills the deal, or taking Rs 60 crore off and forgetting the two years of time value.
The second loss is stopping at the number. The question asks what you would negotiate, and a buyout interviewer wants structure: an indemnity, an escrow or a holdback, so the risk sits with the party that knows it best.
What the interviewer asks next
The seller refuses an escrow. What else could you ask for?
How would you treat the lawsuit in the enterprise value to equity value bridge?
If your lawyers say the chance of losing is between 20% and 50%, how does that change your approach?
Asked at Ares Management, Infrastructure, London, 2025 (Wall Street Oasis): How would you itemise a potential lawsuit?

p	the chance of losing, 30%
D	damages if lost, Rs 200 crore
r	the discount rate, 10%
t	years until payment, 2

Try it first

How do you put a number on something that may never happen?

Why is a price cut not the best answer?

Where candidates lose it

What the interviewer asks next