1. Cost of capital (LO11-2 L)) 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, 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 its cost of capital?

2. Effect of discount rate (LO11-2 2) ) A brilliant young scientist is killed in a plane crash. It is anticipated that he could have

earned $240,000 a year for the next 50 years. The attorney for the plaintiff's estate argues that the lost income should be

discounted back to the present at 4 percent. The lawyer for the defendant's insurance company argues for a discount rate of 8 percent. What is the difference between the present value of the settlement at 4 percent and 8 percent? Compute each one separately.

3.

5. Aftertax cost of debt ( 201/3 (3) j Calculate the aftertax wos of debt under exch of the following conditions: \begin{tabular}{lcc} \hline & Yield & Corporate Tax Rate \\ a & 8,0% & Is\& \\ b. & 12.0 & 34 \\ \& & 10.6 & 15 \\ \hline \end{tabular}