5. On the spreadsheet associated with this chapter you will find the following monthly data for IBM's stock price and the S&P 500 index during 1998:

a. Use these data to calculate IBM's β.

b. Suppose that at the end of 1997, the risk-free rate was 5.50 percent. Assuming that the market risk premium, E (rm)−rf = 8 percent and that the corporate tax rate TC = 40 percent, calculate IBM's cost of equity using both the classic CAPM security market line and Benninga-Sarig's tax-adjusted security market line.

c. At the end of 1997, IBM had 969,015,351 shares outstanding and had $39.9 billion of debt. Assuming that IBM's cost of debt is 6.10 percent, use your calculations for the cost of equity in part b to arrive at two estimates of IBM's weighted average cost of capital.