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, partially 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 expense was $227 million, and its assumed statutory tax rate was 37%.

Kellogg has an estimated market beta of 0.70. Assume that the expected risk-free rate is 2.5% and the expected market premium is 5%.

a. What does Kellogg's market beta imply about its stock returns?

A beta of 0.70 indicates Kellogg's stock is less volatile than the market index.

A beta of 0.70 indicates Kellogg's stock is more volatile than the market index.

A beta of 0.70 indicates Kellogg's stock moves perfectly with the market index.

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