## Debt Ratio Regression: January 2018

**
**

*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 = 0.30 + 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

**
**

**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 = 0.30 -.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.