1.JP Inc. is a small company in the business of producing and selling musical CDs and cassettes and it is also involved in promoting concerts. JP`s stock has been listed on the NASDAQ for the last two years and is trading at twice the book value of equity. (The book value of equity is $120M). JP derives 75% of its total market value from its record/CD business and 25% from the concert business. While the price data on the company is insufficient to estimate a beta, the beta of comparable firm in these businesses is as follows.

Business

Average asset beta

Record/CD

0.88

Concert Business

1.13

The debt is composed of ten year bonds of 60M at maturity with annual coupon payment of 5M per year and is rated A (typical A rated bonds are yielding 10% currently in the market). The current risk free rate is 8% and market risk premium is 5.5%. Assume no corporate taxes (7 marks)

1. Estimate the current cost of equity?
2. Estimate the current weighted average cost of capital?