__Estimating the Cost of Equity Capital__
Kellogg Company manufactures cereal and other convenience food under its many well-known brands such as Kellogg’s, Keebler, and Cheez-It. The company, with over $13.5 billion in annual sales worldwide, partilly finances its operation through the issuance of debt. At the beginning of its 2015 fiscal year, it had $6.5 billion in total debt. At the end of fiscal year 2015, its total debt had increased to $6.6 billion. Its fiscal 2015 interest expens was $227 million, and its assumed statutory tax rate was 37%.
Kellogg has an estimated market beta of 0.60. Assume that the expected risk-free rate is 2.5% and the expected market premium is 5%.
1. What does Kellogg’s market beta imply about its stock returns?
a.A beta of 0.60 indicates Kellogg’s stock is less volatile than the market index.
b. A beta of 0.60 indicates Kellogg’s stock is more volatile than the market index.
c.A beta of 0.60 indicates Kellogg’s stock moves perfectly with the market index.
2. Estimate Kellogg’s cost of equity capital.
Please provide detailed explanation of your answer.
