# Question

Plastico is interested in how it compares with its competitors in the same industry.

a. Taking each of these variables, explain at an intuitive level whether you would expect Plastico to have more or less debt than its competitors and why.

b. You have also run a regression of debt/equity ratios against these variables for all the firms on the NYSE and have come up with the following regression equation:

D∕E = 0.10 − 0.5 (Variance in EBITDA)

+ 2.0 (EBITDA∕MV)

+ 0.4 (Tax Rate)

+ 2.5 (R&D ∕Sales)

(All inputs to the regression were in decimals, i.e., 20% was inputted as 0.20.) Given this cross sectional relationship, what would you expect Plastico’s debt/equity ratio to be?

a. Taking each of these variables, explain at an intuitive level whether you would expect Plastico to have more or less debt than its competitors and why.

b. You have also run a regression of debt/equity ratios against these variables for all the firms on the NYSE and have come up with the following regression equation:

D∕E = 0.10 − 0.5 (Variance in EBITDA)

+ 2.0 (EBITDA∕MV)

+ 0.4 (Tax Rate)

+ 2.5 (R&D ∕Sales)

(All inputs to the regression were in decimals, i.e., 20% was inputted as 0.20.) Given this cross sectional relationship, what would you expect Plastico’s debt/equity ratio to be?

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