How do you choose the pretax cost of debt — YTM, coupon, or credit spread?

Three methods in descending priority:

• Yield-to-maturity (market standard): the YTM of outstanding bonds reflects current market conditions. The coupon rate is wrong because it is fixed historically.
• Credit-spread method: Rf + credit spread from rating and sector — practical when there is no tradable bond.
• Bank loan pricing: the company's current loan terms — an alternative when there is no bond and no rating.

Private targets often have no bonds. Estimate a rating from leverage ratios (Debt/EBITDA, interest coverage), then apply a sector-typical credit spread. Private-placement terms are often publicly available and give a good indication.