Quantitative Analysis Expert Answer

Estimate the value (per share) of the Aristocrat Leisure Limited (ALL.AX) using Free-Cash-Flow-to Equity (FCFE) method:

(All values in $ and million)

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Change in Non-cash Working Capital = Current assets net of cash – Current Liabilities

Year	Current assets net of cash	Current Liabilities	Non-cash Working Capital
2019	1164.6	1041.4	123.2
2018	924	1017.5	(93.5)
2017	647.9	653.1	(5.2)

Change in Non-cash Working Capital 2019 = $216.7

Change in Non-cash Working Capital 2018 = ($88.3)

Net Debt Issued = Cash and cash equivalents – Non-current borrowings

Year	Cash and cash equivalents	Non-current borrowings	Net Debt Issued
2019	568.6	2792.7	(2224.1)
2018	428.1	2881.1	(2453.0)

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Capital Expenditures = Mention in the statement of Cash flows

Debt Repayments = Mention in the Annual report 2019 of ALL.

Year	Net Income	Capital Expenditures	Depreciation	Change in Non-cash Working Capital	Net Debt Issued	Debt Repayment	FCFE
2019	698.8	247.9	434.3	216.7	(2224.1)	293.1	(1848.7)
2018	542.6	198.1	355.6	(88.3)	(2453.0)	225.8	(1890.4)

Value (per share) of Company:

Here, WACC is used to calculate the value of company. The formula of WACC is as follows:

Based on the statistics used by GuruFocus. (n.d.) as per September 2019 data of Aristocrat Leisure Ltd (ALL), the market capitalization of ALL is $9201.710 which is known as the market value of equity (E). The market value of debt (D) is the average of two year of ALL’s short-term Debt & Capital Lease Obligation and Long-Term Debt & Capital Lease Obligation together. As per September, 2019, the average value is 1989.700.

Weight of equity = E / (E+D) = 9201.710 / (9201.710 + 1989.700) = 0.822
Weight of debt = D / (E + D) = 1989.700 / (9201.710 + 1989.700) = 0.178

Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Market Premium)

The 10-Year Treasury Constant Maturity Rate is used here as the risk-free rate, which is 0.9800%. The value of beta is 1.01 and market premium is 6%.

Cost of equity = 0.9800% + 1.01 * 6% = 7.04%

Cost of debt = Interest Expense / two year average debt

Cost of debt = 92.0927 / 1989.700 = 0.0463%

Here, the latest two year average tax rate is used for the calculation, which is 28.56%

Weight of equity	Weight of debt	Cost of equity	Cost of debt	Tax rate	WACC
0.822	0.178	0.0704	0.0463	(1 – 0.2856)	0.0638 or 6.38%

Equity value = -1848.7 / (1 – 0.0638) = -1974.68

Value per share = Total value of equity / number of outstanding shares

Number of outstanding shares = 638.54 (Market.ft. (n.d.))

Value per share = 2143.6 / 638.54 = $3.357

Dividend Policy of Aristocrat Leisure Limited (ALL):

Usually dividends are taken out of corporate profits, and if a firm spends more than it received, the payout is typically at a greater risk of being reduced. Aristocrat Leisure pays out an reasonable 51 per cent of its income, a standard payout level among many companies. However, cash flows are much more critical than earnings to determine a dividend, and we need to check if the firm has raised adequate cash to pay for its distribution. It paid as dividends 41 per cent of its free cash flow, a decent amount of payout level for most firms. It is inspiring to note that both profit and cash flow encompass the dividend. This indicates that the dividend is usually sustainable as long as income do not fall rapidly.

Shareholders also keep an eye on the company’s policy on dividends and relevant choices. In this way, the dividends of Aristocrat Leisure are sustainable, its dividend distributions are fairly secure, and it has good potential for rising its earnings and dividends. First, we believe Aristocrat Leisure has a reasonable payout ratio and the cash flow suits the dividend adequately. Second, improvement in earnings was strong indicator but unfortunately in the past the dividend was cut at least once. Aristocrat Leisure has several great attributes about it. Moreover, the key method that most investors can determine the dividend potential for a business is by reviewing the historical pace of dividend growth. Aristocrat Leisure has increased the dividend by around 4.5 per cent a year on average for the last ten years which is an extremely good indicator for the company.