Debt Ratio Regression: January 2008
Variables used in the regression
- Debt
Ratio = Debt/ (Market Value of Equity + Debt): If you can get market value
of debt, use it. Else, use book value of debt.
- Insider
Holdings = Shares held by insiders/ Primary number of shares outstanding.
(Available on Yahoo! Finance)
- Expected growth rate in EPS - (Available on Yahoo! Finance). If you cannot get an estimate, use your own estimate of growth.
- 3-year standard deviation = Standard deviation in stock returns (ln prices) over the last 3 years. (Estimates for US companies are available in the ful dataset under updated data)
- EBITDA/
Enterprise Value = EBITDA/ (Market Value of Equity + Debt - Cash)
Model Summary
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Model
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R
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R Square
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Adjusted R Square
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Std. Error of the Estimate
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1
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.408a
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.166
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.163
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17.8272426
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a. Predictors: (Constant),
3-yr Standard Deviation (Stock Price), Insider Holdings, EBITDA/ Firm
Value, Expected Growth in EPS: next 5 years
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Coefficientsa,b
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Model
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Unstandardized Coefficients
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Standardized Coefficients
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t
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Sig.
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B
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Std. Error
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Beta
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1
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(Constant)
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.176
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.016
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10.979
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.000
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EBITDA/ Enterprise Value
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.588
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.058
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.298
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10.101
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.000
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Expected Growth in EPS: next 5 years
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-.255
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.074
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-.109
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-3.454
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.001
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Insider Holdings
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-.069
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.047
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-.040
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-1.480
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.139
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3-yr Standard Deviation (Stock Price)
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-.230
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.050
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-.134
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-4.623
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.000
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a. Dependent Variable:
Market Debt to Capital
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b. Weighted Least Squares
Regression - Weighted by Market Cap
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- How do I use this regression?
Assume that you want to estimate the market debt ratio for a firm with the following characteristics:
Insider holdings = 9% of outstanding stock
Expected growth rate in EPS= 10%
EBITDA/ Enterprise Value = 8%
3-year standard
deviation = 40%
- Predicted Value
Expected Debt Ratio= 0.176 + 0.588 (.08) -.255 (.10) -.069 (.09) - .23 (.4) = .0993 or 9.93%
If your predicted value is less than zero, your predicted debt ratio is zero.