Cost of Capital for Companies in Distress
Carla Nunes and Anas Aboulamer have published "Cost of Capital for Companies in Distress". The publication is a publicly available chapter of the book "Valuation for INSOLvency Practitioners", 2025, with permission by INSOL.
A company’s cost of capital can be directly affected by periods of distress, such as a sustained decline in demand for its goods or services, or changes in the outlook of an industry caused by regulation, technology and other factors. The current uncertain environment, for example, created by volatile trade and tariff policies, will likely lead some companies to experience distress, potentially forcing them to engage in distressed debt exchanges or even file for bankruptcy.
Distress affects not only the company’s debt holders, but also those with equity interests in the company and its other stakeholders. Distress can represent a significant cost to the firm and considerably impact its value and future survival. Therefore, when estimating the value of the firm, 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.
Recently, Kroll experts contributed various chapters to a book published by INSOL entitled Valuation for Insolvency Practitioners. With the permission of INSOL, the chapter 'Cost of Capital for Companies in Distress' can be accessed for free. In this chapter, Managing Director Carla Nunes and her Kroll colleagues Anas Aboulamer and Molly Jennerman discuss the impact of distress on company valuation. They provide practical insights on how to adjust 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, the different approaches used to incorporate distress into valuations, the models and data used to estimate the probability of distress and the insights and examples that demonstrate how to adjust a company’s cost of capital inputs for companies in distress.