Chiliâs Restaurants, Inc., is trying
to determine its cost of debt. The firm has a debt issue outstanding with 18
years to maturity that is quoted at 107 percent of face value. The issue makes
semiannual payments and has an embedded cost of 6 percent annually. What is the
companyâs pretax cost of debt? If the tax rate is 35 percent, what is the
aftertax cost of debt?
Stock in Plantronics Industries has
a beta of 1.1. The market risk premium is 7 percent, and T-bills are currently
yielding 4.5 percent. The companyâs most recent dividend was $1.70 per
share, and dividends are expected to
grow at a 6 percent annual rate indefinitely. If the stock sells for
$39 per share, what is your best estimate of the companyâs cost of equity?