FIN3CFI- Corporate Finance

ASSIGNMENT

Semester 1 2023

Bui Duy Trung - 20930149

Teacher: Nguyen Thi Thanh Loan

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Long-term Debt / Total Assets
ASX
year 2018 year 2019 year 2020 year 2021 year 2022 Period 2018 - 2022
Code

ALL 0.49 0.44 0.44 0.40 0.26 0.41

SGR 0.13 0.17 0.26 0.24 0.25 0.21

TAH 0.26 0.27 0.30 0.22 0.07 0.22

FLT 0.00 0.03 0.16 0.30 0.32 0.16

SKC 0.20 0.19 0.12 0.20 0.21 0.18

DMP 0.46 0.45 0.53 0.49 0.52 0.49

WEB 0.08 0.12 0.15 0.12 0.22 0.14

SWM 0.41 0.48 0.68 0.45 0.35 0.47

CKF 0.40 0.39 0.57 0.55 0.55 0.49

ALG 0.04 0.17 0.62 0.67 0.03 0.31

SXL 0.24 0.27 0.33 0.17 0.23 0.25

PBH - - 0.04 0.01 0.01 0.02

SKT 0.16 0.25 0.09 0.05 0.05 0.12

DNA 0.10 0.07 0.02 0.04 0.04 0.05

SEG - 0.12 0.24 0.16 0.30 0.20

JIN - - 0.04 0.03 0.02 0.03

RCT 0.85 0.84 0.85 0.82 0.80 0.83

AKG 0.00 - 0.37 0.36 0.30 0.26

TCO 0.44 0.08 0.22 0.08 0.08 0.18

AQS 1.58 1.88 1.80 1.68 - 1.73

Industry 0.34 0.37 0.39 0.35 0.24 0.34

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Average

Long-term Debt / Total Equity

ASX
year 2018 year 2019 year 2020 year 2021 year 2022 Period 2018 - 2022
Code

ALL 1.66 1.30 1.09 0.89 0.44 1.08

SGR 0.18 0.26 0.42 0.35 0.39 0.32

TAH 0.47 0.49 0.63 0.38 0.10 0.41

FLT 0.00 0.07 0.46 1.02 1.55 0.62

SKC 0.44 0.43 0.23 0.34 0.36 0.36

DMP 1.93 1.87 3.36 2.90 2.98 2.61

WEB 0.20 0.29 0.23 0.22 0.42 0.27

-
SWM 1.47 6.34 4.08 8.15 1.82 2.74

CKF 0.86 0.83 1.90 1.75 1.81 1.43

ALG 0.06 0.31 2.32 3.60 0.52 1.36

SXL 0.60 0.74 0.86 0.36 0.54 0.62

PBH - - 0.05 0.02 0.02 0.03

SKT 0.23 0.55 0.20 0.09 0.08 0.23

DNA 0.12 0.10 0.03 0.05 0.06 0.07

SEG - 0.19 0.51 0.40 0.77 0.47

JIN - - 0.06 0.04 0.02 0.04

RCT 7.58 7.31 9.68 6.66 6.00 7.45

AKG 0.01 - 1.11 1.05 0.91 0.77

TCO 1.01 0.11 0.40 0.14 0.12 0.36

- - - - -
AQS 1.90 1.65 1.72 1.72 - 1.75

Industry 0.88 1.15 0.89 1.33 0.99 0.97

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 Average

I. Aristocrat Leisure Limited’s long-term debt/total assets

The long-term debt to total assets ratio (LTD/TA) illustrates how much of a company's total assets
are made up of liabilities that persist for longer than a year. Because only long-term obligations and
not all debts are considered, this ratio emphasizes the long-term viability of the company
(Sivalingam & Kengatharan, 2018).

1. Aristocrat leisure long-term debt/total assets

Long-term debt/Total assets ALL

0.60

0.50

0.40

0.30

0.20

0.10

-
year 2018 year 2019 year 2020 year 2021 year 2022

These metrics are used to demonstrate a company's ability to manage its financial responsibilities.
Aristocrat Leisure Company's long-term debt to total assets ratio was below 0.5 in 2018, which is
positively assessed (Sivalingam & Kengataran, 2018). The slight year-on-year decline in this ratio
from 2018 to 2022 could indicate that the company is relying less on debt to grow its business,
which is, is attractive to investors and lenders who do not need to incur large amounts of debt in
this situation. These companies still have a lot of unleveraged assets, so if a crisis hits, you should
be concerned.
From the balance sheet in 2022, the number of long-term debts the company has is $2,629 million
while its total assets are summed up to be $10,120 million. Thus, the long-term debt to total assets
would be 0.26. As a result, the great majority of the company's assets come from stock funding. As
a result, choosing to invest in this company is frequently a safe decision. To have a deeper insight,
the venture capitalist must consider additional elements.

2. Consumer service industry long-term debt/total assets

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 Long-term debt/Total assets Consumer
services industry
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
-
year 2018 year 2019 year 2020 year 2021 year 2022

The ratio of long-term debt to total assets of the consumer services industry is unlikely to exceed
0.4, the industry's highest ratio is 0.39 in 2020. Compared to Aristocrat Entertainment Co., Ltd., the
long-term debt-to-total assets ratio of the company shows that this ratio is higher than the ratio of
the industry at 10% in 2018, it implies that the business is relatively risky and would eventually
find it difficult to pay its debts. However, in the next five years, the company has shown a
significantly decreased in the long-term debt-to-total assets ratio. Aristocrat Entertainment Co
made up 26% in 2022, which is nearly equal to the consumer services industry at 24%. This is the
result of the improvement in the total asset of the company, they had increased doubled from
$5,846 million to $10,120,400 million.

$ Million 2021 2022

Cash and cash equivalents $ 2,431 $ 3,021
Property, plant, and
equipment $ 325 $ 359
Intangible assets $ 3,527 $ 3,891
Other assets $ 2,387 $ 2,850
Total assets $ 8,670 $ 10,120

The reasons for the increase include currency conversion, the company's extraordinary capacity to
generate operating cash flow, and the $1.3 billion in funds raised through stock-based activities for
the now-defunct Playtech acquisition attempt. These benefits are offset by the repayment of the
$1.1 billion Term Loan Facility, $312 million in completed On-Market Share Buy-Backs1, and
dividend payments.

II. Aristocrat Leisure Limited’s long-term debt/equity ratios

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Leverage is calculated using the long-term debt-to-equity ratio, which contrasts a company's total
long-term debt with its shareholders' equity. Finding out how much debt the corporation is taking
on is the goal of this ratio. A higher ratio shows that the company is racking up more debt. As a
result, they are considerably more vulnerable to financial danger (Bertoneche & Knight, 2001).
According to the balance sheet of aristocrat leisure limited, in the fiscal year of 2018, the business
has a long-term debt amount of $2,881 million while the total shareholders’ equity ratio is $1,732
million. Thus, the long-term debt of ALL is around 1.6 times more than its shareholders' equity,
based on an assumed long-term debt-to-equity ratio of 1.66. This seems to be a very high number,
considering into account other companies' liabilities in the consumer services industry. The
company may be taking on too much risk, at first appearance. To get a truer view, however,
contrast this result with industry benchmarks and prior financial performance.

1. Aristocrat leisure long-term debt/shareholders’ equity

Long-term debt/Total equity ALL

1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
-
year 2018 year 2019 year 2020 year 2021 year 2022

From the table above, Aristocrat Leisure's long-term debt-to-equity ratio decreased slightly from
1.66 in 2018 to 0.89 in 2021, then at this point, the ratio dropped significantly to a half which
accounted for 0.44 in 2022. The firm's total shareholder equity increased as a result of efforts to
raise capital in connection with the now-expired Playtech acquisition offer, period profits, and
changes to reserves as a result of currency fluctuations, which were partially offset by on-market
share buybacks and dividend payments. A lower percentage means the company is taking on less
debt. They are consequently frequently less susceptible to monetary risk. Due to the fact that ALL's
leverage is decreasing, and that the ratio is getting less every year, it is believed that the business is
being successfully managed.

  2022 2021
Currency Fluctuation/Translation $602,200 $44,800
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 Reserve
Hedging reserves $19,300 $(34,400)
Ordinary Shares $1,651,900 $715,100
Other reserves $(73,700) $(68,900)
Retained Profits/(Losses) $3,823,000 $3,222,300
Total Equity $6,022,700 $3,878,900

2. Consumer service industry long-term debt/shareholders’ equity

Long-term debt/Total equity Consumer

services industry
1.60

1.40

1.20

1.00

0.80

0.60

0.40

0.20

-
year 2018 year 2019 year 2020 year 2021 year 2022

As can be seen from the consumer services industry, its long-term debt-to-equity ratio fluctuation
from around 0.88 to 0.99 in the past five years. Aristocrat Leisure's long-term debt-to-equity ratio
had always been higher than its average industry ratio from 2018 to 2020, however, in the next two
years the trend of Aristocrat Leisure dropped under its whole industry to 0.44 in 2022 which is two
times smaller than consumer service industry long-term debt-to-equity ratio at 0.99.

III. The Star Entertainment Group Limited (SGR)

ASX Total Assets

Code 2018 2019 2020 2021 2022
5,846. 6,337. 7,876. 8,672.
ALL 8 0 9 0 10,120.4
5,270. 5,583. 5,675. 5,373.
SGR 8 7 9 3 5,271.4

Based on the total asset in 2022 in the Australian consumer service industry, Star Entertainment
Group Limited ranks second place right after Aristocrat Leisure company, respectively, at $5,271.4
million and $10,120.4 million. Despite having the same amount of assets in 2018, Aristocrat
Leisure Limited show faster growth in terms of five years period

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The long-term debt/total assets

ASX year year year year year Period 2018 -

Code 2018 2019 2020 2021 2022 2022
0.4 0.4 0.4 0.4 0.2
ALL 9 4 4 0 6 0.41
0.1 0.1 0.2 0.2 0.2 0.21
SGR 3 7 6 4 5

Long-term Debt / Total Assets

0.60

0.50

0.40

0.30

0.20

0.10

-
year 2018 year 2019 year 2020 year 2021 year 2022

ALL SGR

As can be seen from the table above Star Entertainment Group in 2018 has a safe long-term debt-
to-assets ratio compared to the consumer service industry, while Aristocrat Leisure has a much
higher ratio. This means that Star Entertainment Group takes a lower leverage than Aristocrat
Leisure company and the company is taking on less debt and lower financial risk since both
companies have the same amount of assets in this period. Over the next five years, SGR shows an
upward long-term debt-to-assets trend which means the company is generated by getting more
debt. Contrary to SGR, ALL has done a great job of using the same amount of debt over the years
but still being able to increase its total asset and equity.
Long-term debt/equity

ASX year year year year year Period 2018 -

Code 2018 2019 2020 2021 2022 2022
1.6 1.3 1.0 0.8 0.4
ALL 6 0 9 9 4 1.08
0.1 0.2 0.4 0.3 0.3
SGR 8 6 2 5 9 0.32

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 Long-term Debt / Total Equity
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
-
year 2018 year 2019 year 2020 year 2021 year 2022

ALL SGR

IV. Optimal Capital Structure

1. Optimal Capital Structure

For a company to operate well, its financial structure must be optimum. The goal is to arrive at a
point when debt and equity, the two main types of financing, complement one another (Artikis,
2007).
The finances and cash flow of a firm can be impacted by a variety of variables. The corporation is
significantly impacted by the funding sources because they alter how much the company is valued.
A business can readily take on debt since it is the least expensive type of capital to maintain output.
This is accurate since debt interest payments are usually risk-free costs that can be deducted from
income (Baker & Wurgler, 2015). However, excessive borrowing influences a company's ability to
pay dividends and insolvency risk. The company is still required to pay interest on its loans even if
there is a loss. As a result, it reduces the profit that may be paid out as dividends (Baker &
Wurgler, 2015). Equity shareholders' risks consequently rise. In such a case, shareholders must be
compensated for the extra risk. Therefore, if equity costs rise, the benefits of low-cost borrowing
are diminished. On the one hand, a company can find it more profitable to take on debt than more
expensive equity (Artikis, 2007). A corporation must constantly look for cheap resources and
engage in efficient financial planning and administration if it wants to avoid accruing considerable
debt. If the corporation develops the best capital structure it can function better.

2. Business risk

Any company must understand, anticipate, and manage operational and management risks. When
choosing the optimum capital structure, a corporation frequently needs to consider two main
categories of risk considerations: business risk and financial risk. Business risk is closely tied to
changes in a company's profitability, demand, supply, income, and revenue generation. As a result,
the organization's overall capital structure is impacted by the corporation's capacity to handle these
risks (Anderson, 2013).

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 EBIT/Total Assets
ASX Code year 2018 year 2019 year 2020 year 2021 year 2022 Period 2018 - 2022
ALL 17.39% 18.37% 7.29% 14.60% 15.78% 4.38%
ALL 17.39% 18.37% 7.29% 14.60% 15.78% 1.67%

According to the company's long-term debt-to-equity ratio, Aristocrat Leisure went from having a
high business risk in 2018 to having a low business risk in 2022, meaning it has utilized more
equity than debt to finance its assets. The investor now understands that the returns on his portfolio
fluctuate by approximately 4.38% yearly by calculating the standard deviation of Aristocrat
Leisure's return on assets (EBIT/Total Assets). Aristocrat Leisure has shown an unstable amount of
operating profit in the past five years, mainly because of the return on asset ratio in 2020. However,
the operating benefit increased back to the normal trend in 2021. The standard deviation without
the year 2020 was calculated at 1.67%. Because of the high standard deviation of the ROA ratio,
Aristocrat Leisure has stopped making operating profits from using debt, and changed to using
equity instead.

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 EBIT/Total assets
20.00%
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
year 2018 year 2019 year 2020 year 2021 year 2022

Moreover, the ROA ratio of the company recover significantly after the drop in 2020, which proves
that the organization is using its assets more effectively than it had previously. As a result,
Aristocrat Leisure has an optimal debt/equity ratio.
V. Dividend

Announcement date Div Price

$
27-May-22 26.00
$
31-May-21 15.00

Details of Dividend Event Identified    

Interim/Final Interim
Dividend increase/dividend decrease Increase
Event date (announcement date) 27-May-22
Percentage of dividend changes 73.33%

3-day market index

  3-day stock return return 3-day excess return
3-day stock return - 3-day market index
Formulas (P2-P1)/P1 (P2-P1)/P1 return
Working
s 2021 -2.29% 2021 -0.51% 2021 -1.78%
  2022 3.00% 2022 2.54% 2022 0.45%
2022-
Results 2021 5.29% 2022-2021 3.06% 2022-2021 2.23%

2-day market index

  2-day stock return return 2-day excess return
Formulas (P2-P0)/P0 (P2-P0)/P0 2-day stock return - 2-day market index

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 return
Working
s 2021 -0.24% 2021 -0.27% 2021 0.02%
  2022 0.29% 2022 1.45% 2022 -1.16%
2022-
Results 2021 0.53% 2022-2021 1.71% 2022-2021 -1.18%

a. Signaling Hypothesis
Dividend-paying companies frequently use educational content to improve their market position.
Investors place a higher value on a company that consistently pays dividends because it stands to
gain more from market investments made by creditors, lenders, and investors. Therefore, Aristocrat
Leisure makes advantage of the knowledge to increase share prices or raise money by regularly
distributing dividends. This approach to alerting investors when dividend payments would be made
is known as the dividend signaling theory (Francis et al., 2010).
The MM model predicts that a firm will attract more investors than one that cannot keep up with
dividend growth. As a result, educational content might be advantageous for Aristocrat Leisure
Limited. The idea of dividend signaling improves the company's standing (Chang, 2023).
.

b. Free cash flow Hypothesis

Increased dividend payouts may result in lower agency fees. Agency costs are likely to occur
when a company generates free cash flows, which are defined as cash flows above the amount
required to finance all projects with positive NPVs that are currently viable. Managers are pushed
to promote expansion since it is expected that when a firm grows, power and income will follow
(Chang, 2023). Therefore, managers of organizations with free cash flows are more inclined to
hang onto money and use it in such initiatives even when new projects have negative net present
values (NPVs) (Chang, 2023). The problem at hand is overinvestment. Therefore, shareholders'
wealth will improve if managers decide to distribute this extra cash as dividends as opposed to
keeping it within the business.

c. Clientele Hypothesis
The clientele effect addresses how a company's stock price may be impacted by the wants and
demands of its investors. In reaction to a tax change, dividend, or other corporate action that affects
a company's shares, these investor requests are made. The clientele effect predicts that when a
company alters one or more of these rules, certain investors will adjust their stock holdings to
reflect the change (Kawano, 2014). This assumes that some investors are attracted to specific
corporate policies at first. Stock prices may fluctuate because of this update. The decision by the
Aristocrat Leisure Company to increase the dividend payout from $15 in 2021 to $26 in 2022 may
have caused a three-day increase in the stock price of 5.29% around the time of the announcement.

VI. References

Anderson, E. J. (2013). Business Risk Management Models and Analysis (1st ed..). Wiley.

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Artikis, G. P. (2007). Capital structure. Emerald Group Press.

Baker, M., & Wurgler, J. (2015). Do Strict Capital Requirements Raise the Cost of Capital? Bank
Regulation, Capital Structure, and the Low-Risk Anomaly. The American Economic
Review, 105(5), 315–320. https://doi.org/10.1257/aer.p20151092

Bertoneche, M., & Knight, Rory. (2001). Financial performance. Butterworth-Heinemann.

Chang, K.-P. (2023). Corporate Finance: A Systematic Approach (1st ed. 2023..).

Francis, B. B., Hasan, I., Lothian, J. R., & Sun, X. (2010). The Signaling Hypothesis Revisited:
Evidence from Foreign IPOs. Journal of Financial and Quantitative Analysis, 45(1), 81–
106. https://doi.org/10.1017/S0022109010000037

Kawano, L. (2014). The Dividend Clientele Hypothesis: Evidence from the 2003 Tax
Act. American Economic Journal. Economic Policy, 6(1), 114–136.
https://doi.org/10.1257/pol.6.1.114

Sivalingam, L., & Kengatharan, L. (2018). Capital Structure and Financial Performance: A Study
on Commercial Banks in Sri Lanka. Asian Economic and Financial Review, 8(5), 586–598.
https://doi.org/10.18488/journal.aefr.2018.85.586.598

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