Why is the cost of retained earnings the equivalent of the firms own required rate of return on common stock (Ke )?

-Why do we use the overall cost of capital for investment decisions even when only one source of capital will be used (e.g., debt)?

– In computing the cost of capital, do we use the historical costs of existing debt and equity or the current costs as determined in the market? Why?

– What are the two sources of equity (ownership) capital for the firm?

– Why is the cost of retained earnings the equivalent of the firm’s own required rate of return on common stock (Ke )?

-In March 2010 Hertz Pain Relievers bought a massage machine that provided a return of 8 percent. It was financed by debt costing 7 percent. In August 2010, Mr. Hertz came up with a heating compound that would have a return of 14 percent. The Chief Financial Officer, 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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