Chili’s Restaurants, Inc. and Plantronics Industries

    Chili’s 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
    company’s 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 company’s 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 company’s cost of equity?

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