Estimating the Cost of Debt Capital

Kellogg Company manufactures cereal and other convenience food under its many well-known brands such as Kelloggs, Keebler, and Cheez-It. The company, with over $13.5 billion in annual sales worldwide, partially finances its operation through the issuance of debt. At the beginning of its 2018 fiscal year, it had $8.25 billion in total debt. At the end of fiscal year 2018, its total debt had increased to $8.72 billion. Its fiscal 2018 interest expense was $287 million, and its assumed statutory tax rate was 21%.

a. Compute the companys average pretax borrowing cost. (Hint: Use the average amount of debt as the denominator in the computation.)

Round your answer to two decimal places (ex: 0.02345 = 2.35%).

Answer: __%

b. Assume that the book value of its debt equals its market value. Then, estimate the companys cost of debt capital.

Round your answer to two decimal places (ex: 0.02345 = 2.35%).

Answer: __%