Estimating the Weighted Average Cost of Capital

Estimating the Weighted Average Cost of Capital Kellogg Company manufactures cereal and other convenience food under its many well-known brands such as

Estimating the Weighted Average Cost of 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 $6.5 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 0.80. Assume that the expected risk-free rate is 2.5% and the expected market premium is 5%.

Kellogg’<a title="s" href="m){i['GoogleAnalyticsObject']=r;i[r]=i[r]||function(){">s stock closed at $83.87 on December 31, 2015. On that same date, the company had 420,315,589 shares issued, of which 70,291,514 shares were in treasury.

What is Kellogg’<a title="s" href="m){i['GoogleAnalyticsObject']=r;i[r]=i[r]||function(){">s total market capitalization as of December 31, 2015?

Enter answer in billions, rounding to one decimal place.

$Answer 35.2 billion

Compute Kellogg’<a title="s" href="m){i['GoogleAnalyticsObject']=r;i[r]=i[r]||function(){">s WACC.

Use your rounded answer above for computation.

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

Answer 13.75%

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