## Debt Ratio Regression: January 2019

**
**

*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.
- Payout Ratio= Dividends/ Net Income, if Net Income is positve, not available if net income is negative.
- Expected growth rate in EPS- next 5 years= You can use expected or even historical earnings growth, if you don't have an EPS growth forecast
- Effective Tax Rate = Effective tax rate in most recent year

**US Regression
**

**US Regression**

#### Debt Ratio = 0.31 - 0.217 Effective Tax Rate - 0.493 Expected Growth rate in EPS +0.007 Payout Ratio

**With the following t statistics**

Constant: 43.38

Effective Tax Rate: 9.84

Expected Growth Rate in EPS: 12.47

Payout Ratio: 2.25

**
**

**Global Regression
**

**Global Regression**

#### Debt Ratio = 0.32 - 0.107 Effective Tax Rate - 0.441 Expected Growth rate in EPS +0.008 Payout Ratio

**With the following t statistics**

Constant: 378.49

Effective Tax Rate: 7.43

Expected Growth Rate in EPS: 22.10

Payout Ratio: 4.32

**
**

**How do I use this regression?**

Assume that
you want to estimate the market debt ratio for a firm with the following
characteristics, using the US regression

Payout Ratio = 40%

Effective Tax Rate= 20%

Expected growth rate in EPS = 15%

Expected
Debt Ratio = 0.32 - .107 (.20) - .441 (.15) +0.008 (.40) = .2357 or 23.57%

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