How can the cost of debt for a distressed company be assessed?

Assessing the cost of debt for a distressed company is best approached through the yields of bonds or credit default swap spreads of similar companies. When a company is in distress, traditional metrics, such as cash flow or historical interest rates, may not accurately reflect market conditions or the company's current risk profile.

Observing yields on bonds issued by similar companies provides a market-based perspective on the cost of debt. These yields incorporate the prevailing risks associated with companies in similar financial situations, including credit risk and market volatility. Credit default swap spreads also give insight into the market's perception of the likelihood of default, thus serving as a crucial indicator of what investors demand to lend to a distressed entity.

This method helps in understanding the company's relative position within its industry, allowing stakeholders to gauge the appropriate risk premium required by investors. As such, it aligns closely with current market conditions and the company’s financial health, making it the most effective way to assess the cost of debt during distress.