Estimating the Cost of Debt Capital 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 $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’s average pretax borrowing cost. (Hint: Use the average amount of debt as the denominator in the computation.) Round your answer to one decimal place (ex: 0.0345 = 3.5%). Answer% b. Assume that the book value of its debt equals its market value. Then, estimate the company’s cost of debt capital. Round your answer to one decimal place (ex: 0.0345 = 3.5%). Answer%
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
Estimating the Cost of Debt Capital
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 $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’s average pretax borrowing cost. (Hint: Use the average amount of debt as the denominator in the computation.)
Round your answer to one decimal place (ex: 0.0345 = 3.5%).
Answer%
b. Assume that the book value of its debt equals its market value. Then, estimate the company’s cost of debt capital.
Round your answer to one decimal place (ex: 0.0345 = 3.5%).
Answer%
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