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 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 0.50. Assume that the expected risk-free rate is 2.5% and the expected market premium is 5%.

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

A beta of 0.50 indicates Kellogg's stock is less volatile than the market index.

A beta of 0.50 indicates Kellogg's stock is more volatile than the market index.

A beta of 0.50 indicates Kellogg's stock moves perfectly with the market index.

Mark 1.00 out of 1.00

b. Estimate Kelloggs cost of equity capital.

Round answer to one decimal place (ex: 0.0245 = 2.5%).

Answer

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