Aswath Damodaran 370
Extending to the entire market: 2003 Data
! Using 2003 data for firms listed on the NYSE, AMEX and NASDAQ data
bases. The regression provides the following results –
DFR = 0. 0488 + 0. 810 Tax Rate – 0. 304 CLSH + 0. 841 E/V – 2. 987 CPXFR
( 1. 41 a) ( 8. 70 a) ( 3. 65 b) ( 7. 92 b) ( 13. 03 a)
where,
DFR = Debt / ( Debt + Market Value of Equity)
Tax Rate = Effective Tax Rate
CLSH = Closely held shares as a percent of outstanding shares
CPXFR = Capital Expenditures / Book Value of Capital
E/V = EBITDA/ Market Value of Firm
! The regression has an R-squared of only 53. 3 %.
This looks at the entire market and uses the following variables (from Value
Line CD-ROM)
Variance in firm value as proxy for bankruptcy risk
Closely held shares “ disciplinary power of debt
Free Cash flow“ Agency costs
Capital Expenditure/BV “ Need for flexibility
No tax rate variable was used, because it was assumed that most firms have the
same marginal tax rate.
Low R-squared is typical of these large cross sectional regressions.
