Assignment Question
Answer the two questions
SECTION A (40%)
Suppose that you have been asked to analyse LMF Inc. The following information
about the company is given:
Covariance between LMF’s returns and market index returns 0.5%
The variance of the market index returns 0.2%
Number of shares outstanding 100 million
Share price £1.25
Market Value of debt 75 million
Effective Tax rate 30%
The corporate bond issued by LMF Inc. maturing in 5 years and priced to yield 9% is
perfectly representative of all of LMF’s debt.
CONTINUED…

REQUIRED:
a) Calculate the beta of LMF Inc.

b) Calculate the required return by LMF Inc.’s shareholders, given that the yield on 3-
month Sterling Treasury bills (RF) is 5% and the London market risk premium (which
is equal to E(RM)-RF) is 10%.

c) Explain very briefly why do we want to calculate the required return after the
calculation of the beta?

d) Calculate the unlevered beta of LMF Inc.

e) Explain very briefly why do we need to calculate the unlevered beta?

f) Calculate the after-tax Weighted Average Cost of Capital of LMF Inc.

g) Explain very briefly why do we want calculate the WACC?

Suppose that LMF Inc. retires 50 million worth of bonds. Due to this reduction, LMF
bonds will upgrade into the rating and thereby their yield will be lowered by 2%.
Assume that the share price and the number of shares outstanding are unaffected.
h) Calculate the new levered beta

i) Explain very briefly why do we need to calculate a new levered beta?
SECTION B (60%)
In February 2015, Apple Inc. borrowed several billions, despite this, it is the most
profitable public company in history and its cash reserves are £118bn.
How could you explain this choice?
Approaching the question
You are reminded that whilst some questions may very evidently refer to a particular unit
they are all designed to span issues across the entire module. A full answer to the
question will require reflection on the issues that you have encountered throughout the
module. It is important to bear in mind that the content of your answer will depend on
the argument that you wish to put forward in answer to the question and not solely on
the concepts that the question explicitly identifies.
CONTINUED…
3
References

The essay should be fully referenced throughout and contain a bibliography.
Word limit: 800
Guidance
The word limit is 800 words. You should not deviate from this by more or
less than 10%.
All sources used should be clearly identified and appropriately cited in the
main text and in the list of references.
The paper should be word processed, double spaced throughout, in point
12 size font, left justified, with standard margins (at least 2.5 cm on all sides).

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