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KELLOGG: A MINI CAPITAL BUDGETING CASE 1 BY Rathin S. Rathinasamy Professor of Finance Copy Righted by 2008 Rathin S. Rathinasamy & U21G 1 This...

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KELLOGG: A MINI CAPITAL BUDGETING CASE 1 BY Rathin S. Rathinasamy Professor of Finance Copy Righted by ©   2008  Rathin S. Rathinasamy & U21G 1 This Mini Case was developed as Open-book Open-Web (OBOW) Final Exam for the MBA 612 Finance Course of Universitas21 Global (U21G) in the Summer of 2008. The author expresses his thanks to U21G for the permission granted to him to use this case in the UMUC AMBA 605 Course Sections.
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THE CONTEXT Kellogg Company , together with its subsidiaries, is engaged in the manufacture  and marketing of ready-to-eat cereal and convenience foods, such as cookies,  crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles and veggie  foods. These products are manufactured by Kellogg in 19 countries and marketed  in more than 180 countries. Its cereal products are generally marketed under the  Kellogg’s name, and are sold principally to the grocery trade through direct sales  forces for resale to consumers. It also markets cookies, crackers, and other  convenience foods under Kellogg's, Keebler, Cheez-It, Murray, Austin, and  Famous Amos brands to supermarkets in the US through direct store-door  delivery system and other distribution methods.  Image source: Kellogg is doing quite well with annual sales of more than US$12 billion, gross  profit margin of 43.7%, and a net profit margin of 9.1% last year. Its recent Return  on Equity (ROE) is an impressive 48.7%, while Return on Assets (ROA) and  Return on Capital funds are 9.7% and 14.8% respectively.   Kellogg stock is a very popular and highly sought-after investment in the US and  the rest of the world and is held by several institutions as part of their portfolio  holdings. The company is listed on the New York Stock Exchange (NYSE) under  the symbol ‘K’. Kellogg is part of the Standard & Poor’s 500 Index and the  Standard & Poor’s 1500 Composite Index.  Its Indian subsidiary is now among the fastest growing markets although it had a  rocky start in the Indian market. In 1994, Kellogg entered the Indian  market  with a  plan to create new  breakfast  habits. At that time, the Indian market held great  significance for Kellogg because its US sales were stagnating and only regular  price increases had helped boost the revenues in the 1990s. Besides cornflakes,  its product offerings were wheat flakes and basmati rice flakes. However, it  initially met with failure as Indians were used to eating hot breakfast such as 
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