Debt Ratio Regression: January 2018



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. Payout Ratio= Dividends/ Net Income, if Net Income is positve, not available if net income is negative.
  3. 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
  4. Effective Tax Rate = Effective tax rate in most recent year

US Regression

 

 

 

US Regression

Debt Ratio = 0.30 + 0.17 Effective Tax Rate - 0.58 Expected Growth rate in EPS +0.01 Payout Ratio

With the following t statistics
Constant: 20.60
Effective Tax Rate: 3.64
Expected Growth Rate in EPS: 11.52
Payout Ratio: 1.35

 

Global Regression

 

 

Global Regression

Debt Ratio = 0.30 + 0.20 Effective Tax Rate - 0.20 Expected Growth rate in EPS +0.05 Payout Ratio

With the following t statistics
Constant: 34.25
Effective Tax Rate: 6.21
Expected Growth Rate in EPS: 9.99
Payout Ratio: 11.40

 

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 = 0.30 -.17 (.20) +.58 (.15) + 0.01(.40) = 0.357 or 35.70%

 

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