Question

Estimating the Weighted Average Cost of 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 $6.5 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 0.40. Assume that the expected risk-free rate is 2.5% and the expected market premium is 5%.

Kellogg’s stock closed at $50.12 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.

a. What is Kellogg’s total market capitalization as of December 31, 2015?

Enter answer in billions, rounding to one decimal place.

$_________________

billion

b. Compute Kellogg’s WACC.

Use your rounded answer above for computation.

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

Answer ____________%

Answer 1

Answers Page: No O @ Tebal market capitalization as of dec zur Seals Share price = $50112, Total number of issues shares = 420,315,589 Shares in Greasury = 40,291,514 Total market capitalization - Shane price x (Total no.of issueshave - shares in treasury $5010X ( 4 20,315,589 – 70,291,517 = $50.12 x 350024075 = $1.754320664X 10° = $17,543,206,640 .-. Total market capitalization = $19,543,206,640 = $17.5 billion © .: Total market capitalization = $1415 billion Walice Total equity = 17,543,206,640 $6600,000,000 + 6 500,000,000 Total average debt =

Page No ③ =$6550,000,000 weight of cquily - Equilig 1. (Debt & equitay) 197543,206,640 17543206640 + 6550,000,000 14543206640 2.409320664 X1010 0.728139 = éveight of debt = 1- weight of cquity 1-0.728139 0.271861 = Cost of equilý = Risk free vrate + beta x Mooket tisk premium = 2.5% + 0.40x5% 27.5 % + 2% = 41564 cost of debts a $207000,000_wing 6550,000,000 - X100

Page No ③ = 3.465649% WACC = cost of debt x weight of debt X(1-tax) t. cost of equity X: weight of equity = 3.465649 % X 0.371861 *(1-3701) + 415% X 0.428139 = (5.9357 X10-3) + 0.032466a85 0,032566255 -0.0387 = 3.97 11: WACC = 3,9%