Debt Ratio Regression: January 2014
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.
- Expected growth in EPs= Expected annual growth rate in EPS over next five years
- Regression Beta = Beta from a regression or a bottom up beta
- EBITDA/
Enterprise Value = EBITDA/ (Market Value of Equity + Book value of Debt - Cash)
Model
|
R
|
R Square
|
Adjusted R
Square
|
Std. Error of
the Estimate
|
1
|
.293a
|
.086
|
.084
|
1365.48066%
|
a. Predictors: (Constant), Regression
Beta, EBITDA/Enterprise Value, Expected Growth in EPS (next 5 years)
|
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ANOVAa,b
|
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Model
|
Sum
of Squares
|
df
|
Mean
Square
|
F
|
Sig.
|
|
1
|
Regression
|
323975514.43
|
3
|
107991838.14
|
57.919
|
.000c
|
Residual
|
3462446037.2
|
1857
|
1864537.446
|
|
|
|
Total
|
3786421552.3
|
1860
|
|
|
|
|
a. Dependent Variable: Market Debt to
Cap
|
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b. Weighted Least Squares Regression -
Weighted by Market Cap
|
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c. Predictors: (Constant), Regression
Beta, EBITDA/Enterprise Value, Expected Growth in EPS (next 5 years)
|
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Coefficientsa,b
|
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Model
|
Unstandardized
Coefficients
|
Standardized
Coefficients
|
t
|
Sig.
|
||
B
|
Std.
Error
|
Beta
|
||||
1
|
(Constant)
|
0.1479
|
.01375
|
|
10.756
|
.000
|
EBITDA/Enterprise Value
|
.374
|
.092
|
.101
|
4.075
|
.000
|
|
Expected Growth in EPS (next 5 years)
|
-.396
|
.045
|
-.225
|
-8.769
|
.000
|
|
Regression Beta
|
.0580
|
.0095
|
.139
|
6.060
|
.000
|
|
a. Dependent Variable: Market Debt to
Cap
|
||||||
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:
EBITDA/ Enterprise Value = 8%
Expected growth rate in EPS = 10%
Regression Beta = 1.50
- Predicted Value
Expected Debt Ratio = 0.1479 + 0.374 *.08 + 0.058*1.50 - 0.396 *.10 = .2252 or 22.52%
If your predicted value is less than zero, your predicted debt ratio is zero.