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Weighted average cost of capital (WACC)

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In March 2007, Hertz Pain Relievers bought a massage machine that provided a return of 8 percent. It was financed by debt costing 7 percent. In August 2007, Mr. Hertz came up with a heating compound that would have a return of 14 percent. The CFO, Mr. Smith, told him it was impractical because it would require the issuance of common stock at a cost of 16 percent to finance the purchase. Is the company following a logical approach to using cost of capital?

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Solution Summary

The solution explains the concept of WACC- the cost of capital is the weighted average cost of capital (WACC) and not individual costs of debt or equity.

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The company is not following a logical approach to using the cost of capital. The cost of capital is the weighted average cost of capital (WACC) and not individual costs of ...

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