# Estimating the Cost of Debt Capital

Estimating the Cost of Debt Capital

Kellogg Company manufactures cereal and other convenience food under its many well-known brands such as Kellogg’<a title="s" href="m){i['GoogleAnalyticsObject']=r;i[r]=i[r]||function(){">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 \$6.2 billion in total debt. At the end of fiscal year 2015, its total debt had increased to \$6.3 billion. Its fiscal 2015 interest expense was \$266 million, and its assumed statutory tax rate was 37%.

a. Compute the company’<a title="s" href="m){i['GoogleAnalyticsObject']=r;i[r]=i[r]||function(){">s 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 company’<a title="s" href="m){i['GoogleAnalyticsObject']=r;i[r]=i[r]||function(){">s cost of debt capital.