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Question: 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 14percent. 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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