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)?

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?