Morality Money and Motor Cars

PART A:

Assumptions:

-Capital Expenditure major driver of cash flows; keep most of the percentage changes constant.
-Kellogg’s cost cutting initiatives will be successful.
-tendency of Kellogg to pay dividends forever, at a constant growth rate with revenue
-Forecasted cost of capital will be closer to the industrial cost of capital.
-Kellogg able to scale down costs independent of the economy.
-Constant dividend buy back.
-Kellogg WACC to be closer or equal to the industry average (debt restructuring)

Kellogg is operating in an industry that requires a lot of capital to be competitive. The future cash flows of Kellogg are greatly dependent on its capital expenditure and how much debt it uses in its day to day activities. Historically Kellogg has spent a little over 40% of profits on capital expenditure, including property, plant and equipment. If we take into account the acquisitions that Kellogg has made, there will be need to increase this expenditure in order to gain synergy with the entire company.
It is my assumption that due to the acquisitions that Kellogg has taken on, it will ever face increasing capital expenditure as it tries to maintain its profitability margins.
The average net profit margin for Kellogg in previous years has been at least satisfactory with an average of 8.5%. The small percentages indicate that the industry is potentially highly competitive and Kellogg would have to invest a lot in capital, R&D to stay ahead of the competition, leading to ever increasing capital expenditure.
Kellogg’s substantial gross profit margins in relation to its revenue are an indicator of the company’s ability to fluctuate prices with little regard to cost. This allows Kellogg to change prices with inflation as required with regards to inflation. This means that Kellogg will be able to maintain profitability even with increasing inflation and increased costs.
Although Kellogg, has an ever increasing dividend buyback ratio, the