Kellogg 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 stat-uatory 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.
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.