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When applying a recovery approach to the valuation of distressed debt, the principles of a discounted
cash flow approach should still be adhered to. After all, the recovery will ultimately come from cash
flows in one form or another. The analyst should attempt to estimate the amount and timing of cash
flows from a sale or restructuring. This provides support for the analysis and also forces the analyst to
evaluate the specific form and timing of an assumed sale or restructuring. This process will often clarify
implicit assumptions that the analyst may be making.
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