Debt Ratio Regression: January 2023
Variables used in the regression
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
- How do I use this regression?
you want to estimate the market debt ratio for a firm with the following
characteristics, using the Global regression
Effective tax rate = 25%
% held by institutions = 30%
Company age = 37
Expected growth rate in EPS = 12%
Debt Ratio = 42.06 - 0.295 (25) - 0.273*(30)+ 0.145 (37) - 0.196 (12) = 29.51 or 29.51%
predicted value is less than zero, your predicted debt ratio is zero.