Estimating the Cost of Equity Capital

Kellogg Company has an estimated market beta of $0\mathrm{.}85.$ Assume that the expected risk$-$free rate is $2\mathrm{.}1\%$ and the expected market premium is $5\%.$

a$.$ What does Kelloggs market beta imply about its stock returns?

OA beta of $0\mathrm{.}85$ indicates Kellogg's stock is less volatile than the market index.

OA beta of $0\mathrm{.}85$ indicates Kellogg's stock is more volatile than the market index.

OA beta of $0\mathrm{.}85$ indicates Kellogg's stock moves perfectly with the market index.

b$.$ Estimate Kellogg's cost of equity capital.

Round answer to two decimal places $($ex: $0\mathrm{.}02345=2\mathrm{.}35\%).$

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