Debt Ratio Regression: January 2020
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
Payout Ratio = 40%
Effective Tax Rate= 20%
Expected growth rate in EPS = 15%
Debt Ratio = 27.65 + 22.92 (.20) - 63.62 (15 ) - 1.63 (40) = 22.04 or 22.04%
predicted value is less than zero, your predicted debt ratio is zero.