Part A

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 2015 fiscal year, it had $6.3 billion in total debt. At the end of fiscal year 2015, its total debt had increased to $6.4 billion. Its fiscal 2015 interest expense was $187 million, and its assumed statutory tax rate was 37%.

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

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 one decimal place (ex: 0.0345 = 3.5%).

Part B

Estimating the Markets Expected Growth Rate in Dividends

Mattel, Inc. was trading at a price of $29.19 per common share at December 31, 2015. Using the Gordon growth model, estimate the markets expected growth in dividends that is required to yield the $29.19 price per common share. Assume that the current dividend per share is $1.52 and is expected to grow thereafter, and that the cost of equity capital is 8.0%. (Hint: Use the equation for the dividend discount model with increasing perpetuity, at the top of page 12-20.)

Note: Assume current dividend per share is the dividend amount when the constant growth period begins.