The following regression was run using all NYSE firms in 1995
YIELD = 0.0478 âˆ’ 0.0157 BETA
+ 0.0000008 MKTCAP
+ 0.006797 DBTRATIO
+ 0.0002 ROE
âˆ’0.09 NCEX âˆ•TA R2 = 12.88%
where BETA = beta of the stock, MKTCAP = market value of equity + book value of debt, DBTRATIO = book value of debt/MKTCAP, ROE = return on equity in 1994, and NCEXâˆ•TA = (capital expenditures âˆ’ depreciation) âˆ• total assets. The corresponding values for Black and Decker, in 1995, were as follows:
Beta = 1.30
MKTCAP = $5,500 million DBTRATIO = 35%
ROE = 14.5%
NCEXâˆ•TA = 4.00%
Black and Decker had a dividend yield of 1.3% and a dividend payout ratio of 24% in 1995.
a. Estimate the dividend yield for Black and Decker, based on the regression.
b. Why might your answer be different using this approach than the answer to the prior question, where you used only the comparable firms?