Debt Ratio Regression: January 2009

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Variables used in the regression

1. Debt Ratio = Debt/ (Market Value of Equity + Debt): If you can get market value of debt, use it. Else, use book value of debt.
2. Insider Holdings = Shares held by insiders/ Primary number of shares outstanding. (Available on Yahoo! Finance)
3. Expected growth rate in EPS - (Available on Yahoo! Finance). If you cannot get an estimate, use your own estimate of growth.
4. Intangible Assets / Total Assets = (Goodwill + Other Intangible Assets)/ Book value of Total Assets
5. EBITDA/ Enterprise Value = EBITDA/ (Market Value of Equity + Debt - Cash)

• 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%

Intaingible Assets/ Total Assets = 12%

• Predicted Value

Expected Debt Ratio= 0.327 + 0.026 (.08)-0.138 (.09)-.878 (.10) -.064 (.12) = .2218 or 22.18%

If your predicted value is less than zero, your predicted debt ratio is zero.