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 $14.5 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%.

 

Kellogg Company has an estimated market beta of 0.85. Assume that the expected risk-free rate is 2.1% and the expected market premium is 5%.

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

A beta of 0.85 indicates Kellogg's stock is less volatile than the market index.

A beta of 0.85 indicates Kellogg's stock is more volatile than the market index.

A beta of 0.85 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: 0.02345 = 2.35%).