## Debt Ratio Regression: January 2015

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. Pre-tax ROC = EBIT/ (Book Debt + Book Equity - Cash)
3. Expected growth rate in revenues - next 2 years= You can use expected or even historical earnings growth, if you don't have a revenue growth forecast
4. EBITDA/ Enterprise Value = EBITDA/ (Market Value of Equity + Book value of Debt - Cash)

US Regression

Model Summarya
Model | R | R Square | Adjusted R Square | Std. Error of the Estimate
1 | .429b | .184 | .183 | 12.67747
a. Broad Group = United States
b. Predictors: (Constant), Return on Capital (ROC or ROIC), EBITDA‎/EV, Expected growth in revenues - Next 2 years

Coefficientsa,b,c
Model | Unstandardized Coefficients | Standardized Coefficients | t | Sig.
B | Std. Error | Beta
1 | (Constant) | .236 | .008 |  | 30.324 | .000
Expected growth in revenues - Next 2 years | -.023 | .014 | -.032 | -1.613 | .107
EBITDA‎/EV | .548 | .071 | .152 | 7.672 | .000
Return on Capital (ROC or ROIC) | -.367 | .017 | -.398 | -21.034 | .000
a. Broad Group = United States
b. Dependent Variable: Market Debt to Capital Ratio
c. Weighted Least Squares Regression - Weighted by Market Cap (in US $)

Global Regression

Model Summary
Model | R | R Square | Adjusted R Square | Std. Error of the Estimate
1 | .472a | .222 | .222 | 10.43826
a. Predictors: (Constant), Return on Capital (ROC or ROIC), Expected growth in revenues - Next 2 years, EBITDA‎/EV

Coefficientsa,b
Model | Unstandardized Coefficients | Standardized Coefficients | t | Sig.
B | Std. Error | Beta
1 | (Constant) | .278 | .003 |  | 81.203 | .000
Expected growth in revenues - Next 2 years | -.008 | .005 | -.014 | -1.604 | .109
EBITDA‎/EV | .396 | .023 | .147 | 16.873 | .000
Return on Capital (ROC or ROIC) | -.475 | .009 | -.433 | -50.654 | .000
a. Dependent Variable: Market Debt to Capital Ratio
b. Weighted Least Squares Regression - Weighted by Market Cap (in US $)

- 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

EBITDA/ Enterprise Value = 8%

Pre-tax return on capital = 20%

Expected growth rate in revenues = 15%

- Predicted Value

Expected Debt Ratio= .236 -.023 (.15) + .548 (.08) -0.367 (.20) = .203 or 20.30%

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