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
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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 $6.5 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%.
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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- 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 0.80. Assume that the expected risk-free rate is 2.5% and the expected market premium is 5%. Estimate Kellogg’s cost of equity capital. Round answer to one decimal place (ex: 0.0245 = 2.5%). Answer %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 2018 fiscal year, it had $8.25 billion in total debt. At the end of fiscal year 2018, its total debt had increased to $8.72 billion. Its fiscal 2018 interest expense was $287 million, and its assumed statutory tax rate was 21%. Kellogg Company has an estimated market beta of 0.85. Assume that the expected risk-free rate is 2.1% and the expected market premium is 5%. Kellogg’s stock closed at $57.01 on December 31, 2018. On that same date, the company had 420,666,780 shares issued, of which 76,801,314 shares were in treasury. a. What is Kellogg’s total market capitalization as of December 31, 2018? Enter answer in billions, rounding to one decimal…LSP. Co, recently reported $200,000 of sales during the year 2016. The company had $20,000 of outstanding bonds carrying 10% interest rate. Operating costs were $80,000 other than depreciation, and the firm was facing $12,000 as depreciation. Noting that the federal-plus-state income tax rate was 40%. What is the firm's net income at the end of the year 2016?
- Home Depot entered fiscal 2017 with a total capitalization of $21,907 million. In 2017, debt investors received an interest income of $878 million. Net income to shareholders was $8,657 million. (Assume a tax rate of 21%.) Calculate the economic value-added assuming its cost of capital is 10%12-28. Estimating the Cost of Equity 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 0.80. Assume that the expected risk-free rate is 2.5% and the expected market premium is 5%. a. What does Kellogg’s market beta imply about its stock returns? A beta of 0.80 indicates Kellogg's stock is less volatile than the market index. A beta of 0.80 indicates Kellogg's stock is more volatile than the market index. A beta of 0.80 indicates Kellogg's stock moves perfectly with the…At the end of its fiscal year 2012, the Coca-Cola Company (KO) has earnings per share of $2.48 and dividends per share of $1.76. The total depreciation amounts to $1,260 million and capital expenditure amounts to $1,484 million. The company has a debt ratio (total long-term debt to total assets) of 40.41%. The company plans to keep the same debt ratio while raising additional capital through debt to finance new investment for capital expenditure. The company has 4,324.3 million shares outstanding in the market. Assume that the risk-free rate of return stands at 4.57%, market risk premium stands at 5.86%, and the beta of the company is 0.70. a. Calculate FCFE per share.
- Home depot entered fiscal 2017 with a total capitalization of $21,940 million. In 2017 debt investors received interest income of $889 million. Net income to shareholders was $8690 million (assume a tax rate of 21%) calculate the economic value added assuming its cost of capital is 10%An overview of a firm's cost of debt To calculate the after-tax cost of debt, multiply the before-tax cost of debt by . Three Waters Company (TWC) can borrow funds at an interest rate of 10.20% for a period of six years. Its marginal federal-plus-state tax rate is 25%. TWC’s after-tax cost of debt is (rounded to two decimal places). At the present time, Three Waters Company (TWC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,495.56 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If TWC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 3.38% 2.35% 2.94% 3.53%Vanderheiden Press Inc. and Herrenhouse PublishingCompany had the following balance sheets as of December 31, 2018 (thousands of dollars): Earnings before interest and taxes for both firms are $30 million, and the effective federalplus-state tax rate is 40%.a. What is the return on equity for each firm if the interest rate on short-term debt is 10%and the rate on long-term debt is 13%?b. Assume that the short-term rate rises to 20%. Although the rate on new long-term debtrises to 16%, the rate on existing long-term debt remains unchanged. What would bethe returns on equity for Vanderheiden Press and Herrenhouse Publishing under theseconditions?c. Which company is in a riskier position? Why?
- Click to see additional instructions In 2020, ABC corporation had sales revenue of $313,500, operating costs of $275,750, and year-end assets of $205,000. The debt-to-total-assets ratio was 25%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. In 2021, the firm aims to use additional debt financing and increase the debt-to-total-assets ratio to 50%. Assuming that sales and total assets will not be affected, and that the interest and tax rate will both remain constant, by how much value will the ROE change in response to change in the capital structure? (Round to TWO decimals for only ROE and change in ROE, the last two rows; for the remaining values, roundup.) 2020 2021 Total Debt $4 2$ Interest Expense S Total Equity Net Income 06 Return on Equity Change in ROEOregon Office Supply had 24,000,000 in sales last year. The company’s net income was 400,000, its total assets turnover was 6.0, and the company’s ROE was 15 percent. The company is finance entirely with debt and common equity. What is the company’s debt ratio?The Malia Corporation had sales in 2015 of $65 million, total assets of $42 million, and total liabilities of $20 million. The interest rate on the company's debt is 6 percent, and its tax rate is 30 percent. The operating profit margin was 12 percent. What were the company's operating profits and net income? What was the operating return on assets and return on equity? Assume that interest must be paid on all of the debt.