Consider the following historical rate of return series:

Year S&P 500 IBM Year S&P 500 IBM 1991 +0.2631 −0.2124 2000 −0.1014 −0.2120 1992 +0.0446 −0.4336 2001 −0.1304 +0.4231 Year S&P 500 IBM Year S&P 500 IBM 1993 +0.0706 +0.1208 2002 −0.2337 −0.3570 1994 −0.0154 +0.3012 2003 +0.2638 +0.2049 1995 +0.3411 +0.2430 2004 +0.0899 +0.0719 1996 +0.2026 +0.6584 2005 +0.0300 −0.1583 1997 +0.3101 +0.3811 2006 +0.1362 +0.1977 1998 +0.2700 +0.7624 2007 +0.0353 +0.1284 1999 +0.1953 +0.1701

(a) What was IBM’s equity beta over this sample period?

(b) If IBM had a debt/equity ratio of 70%, what was its asset beta? (Hint: To determine a D/A ratio, make up an example in which a firm has a 70% D/E ratio.)

(c) How important is the 1992 observation to your beta estimate?

(d) If HP is similar to IBM in its business but has a debt/equity ratio of 10%, what would you expect HP’s levered equity beta to be?
(Hint: Use the same leverage conversion trick.)