Cost of Capital for Companies in Distress

A company’s cost of capital can be directly affected by periods of distress, such as those caused by a sustained decline in demand for the company’s goods or services, or driven by regulatory, technological and other changes to the outlook of an industry. An example is the current uncertain environment created by volatile trade and tariff policies, which will likely lead some companies to experience distress and potentially force them to engage in distressed debt exchanges or even file for bankruptcy.

Distress affects the company’s debtholders, those with equity interests in the company, as well as other stakeholders of the company. Distress can represent a major cost to the firm and has a considerable impact on its value and future survival. Hence, it is important to consider how these costs impact projected cash flows, as well as both the cost of debt and the cost of equity when estimating the value of the firm.

Recently, Kroll experts contributed various chapters to a book published by INSOL, “Valuation for INSOLvency Practitioners”. The chapter “Cost of Capital for Companies in Distress” can be accessed for free, with the permission of INSOL. In this chapter, Managing Director Carla Nunes and her Kroll colleagues, Anas Aboulamer and Molly Jennerman discussed the impacts of distress on a company’s valuation, providing practical insights on how to make adjustments to projected cash flows and cost of capital estimates to reflect the effects of distress.

Read more, to learn about the lifecycle of a company, the operational and financial costs brought on by distress, different approaches used to incorporate distress in a valuation, models and data to estimate the probability of distress, and insights and examples on how to adjust a company’s cost of capital inputs for companies in distress.