London Discount supermarkets (LDS) is increasing its market share and opening new supermarkets across London and the South East. You have been asked to value the shares at the beginning of 2021 using a discounted free cash flow to firm approach. The company's income statements and balance sheets are shown in Tables 2.1 and 2.2. Capital expenditure in 2021 is estimated to be 22.5 million, and 15.3 million in 2022. As the company's expansion plans come to an end assume that the company's free cash flow to firm will grow at a constant rate of 4% per annum after 2022. LDS's cost of equity is 12% and weighted-average cost of capital is 10%. There were 50 million shares outstanding at the beginning of 2021, and the share price was 2.30. Table 2.1 LDS Summary Income Statements (in millions) 2021 Forecast 894.0 (847.2) 3.2 (17.9) 32.1 2022 Forecast 1,045.3 (982.9) (2.1) (18.5). 41.8 Total revenue Cost of sales Profit on sale of fixed assets Administrative expenses Earnings before interest, taxes, depreciation and amortization (EBITDA) Depreciation and amortization Earnings before interest and taxes (EBIT)* Interest expense Pretax income Income tax expense Net income (8.4) (9.5) 32.3 23.7 (2.6) 21.1 (4.0) 17.1 (6.2) 26.1 (4.7) 21.4 Brackets indicate a negative number *All items used to calculate EBIT are operating items, with the exception of the profit or loss on sale of fixed assets Table 2.2 LDS Summary Balance Sheets at year end (in millions) Current assets Non-current assets Total assets 2020 2021 2022 Estimate Forecast Forecast 172.5 182.5 197.2 267.2 285.9 301.3 439.7 468.4 498.5 Total current liabilities Long-term debt Total liabilities* 160.9 82.3 243.2 163.4 101.2 264.6 173.2 111.8 285.0 Total shareholders' equity 196.5 203.8 213.5 Total liabilities and equity 439.7 468.4 498.5 Trade receivables Trade payables Inventory 72.3 125.8 75.9 79.5 129.2 80.5 89.0 135.1 90.2 37.9 52.6 74.9 *includes net interest bearing debt Brackets indicate a negative number Use the information provided above to help answer the following questions. (a) Forecast LDS's free cash flow to firm in 2021. (b) Forecast LDS's free cash flow to firm in 2022. (22 marks) (c) Calculate LDS's Enterprise Value at the beginning of 2021 based on your cash flow forecasts. (22 marks) (d) Calculate the intrinsic value of each share at the beginning of 2021 and comment on whether the shares looked cheap or expensive on this basis. (14 marks) (e) Calculate the forecast price/earnings (P/E) per share at the beginning of 2021 based on 2021 forecast earnings. If the retail sector P/E is 10 times identify two reasons why LDS's P/E might be different to the sector P/E. (20 marks) London Discount supermarkets (LDS) is increasing its market share and opening new supermarkets across London and the South East. You have been asked to value the shares at the beginning of 2021 using a discounted free cash flow to firm approach. The company's income statements and balance sheets are shown in Tables 2.1 and 2.2. Capital expenditure in 2021 is estimated to be 22.5 million, and 15.3 million in 2022. As the company's expansion plans come to an end assume that the company's free cash flow to firm will grow at a constant rate of 4% per annum after 2022. LDS's cost of equity is 12% and weighted-average cost of capital is 10%. There were 50 million shares outstanding at the beginning of 2021, and the share price was 2.30. Table 2.1 LDS Summary Income Statements (in millions) 2021 Forecast 894.0 (847.2) 3.2 (17.9) 32.1 2022 Forecast 1,045.3 (982.9) (2.1) (18.5). 41.8 Total revenue Cost of sales Profit on sale of fixed assets Administrative expenses Earnings before interest, taxes, depreciation and amortization (EBITDA) Depreciation and amortization Earnings before interest and taxes (EBIT)* Interest expense Pretax income Income tax expense Net income (8.4) (9.5) 32.3 23.7 (2.6) 21.1 (4.0) 17.1 (6.2) 26.1 (4.7) 21.4 Brackets indicate a negative number *All items used to calculate EBIT are operating items, with the exception of the profit or loss on sale of fixed assets Table 2.2 LDS Summary Balance Sheets at year end (in millions) Current assets Non-current assets Total assets 2020 2021 2022 Estimate Forecast Forecast 172.5 182.5 197.2 267.2 285.9 301.3 439.7 468.4 498.5 Total current liabilities Long-term debt Total liabilities* 160.9 82.3 243.2 163.4 101.2 264.6 173.2 111.8 285.0 Total shareholders' equity 196.5 203.8 213.5 Total liabilities and equity 439.7 468.4 498.5 Trade receivables Trade payables Inventory 72.3 125.8 75.9 79.5 129.2 80.5 89.0 135.1 90.2 37.9 52.6 74.9 *includes net interest bearing debt Brackets indicate a negative number Use the information provided above to help answer the following questions. (a) Forecast LDS's free cash flow to firm in 2021. (b) Forecast LDS's free cash flow to firm in 2022. (22 marks) (c) Calculate LDS's Enterprise Value at the beginning of 2021 based on your cash flow forecasts. (22 marks) (d) Calculate the intrinsic value of each share at the beginning of 2021 and comment on whether the shares looked cheap or expensive on this basis. (14 marks) (e) Calculate the forecast price/earnings (P/E) per share at the beginning of 2021 based on 2021 forecast earnings. If the retail sector P/E is 10 times identify two reasons why LDS's P/E might be different to the sector P/E. (20 marks)