I agree that the question is tricky. You might find it useful to read following article:
https://www.investopedia.com/terms/m/marginal-cost-of-funds.asp
I guess the confusion arises from interpreting the requested marginal cost of funds as the weighted-average cost of funds.
Here the question asks for the marginal cost of capital while it says before that anticipated earnings to be retained are 3 Mio.
This means that the anticipated earnings will be retained and will not be available for any projected capital expansion in excess of 7 Mio.
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Giulio La Bua
Director/Manager
OPENTEXT
Munich
Germany
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Original Message:
Sent: 10-05-2019 11:27 AM
From: Jose Onia
Subject: WACC. When do we use RE to lower the Capital Structure % for our Common Stock?
Its asking for the "marginal" that means after exhausting the RE
Original Message------
had the idea that when there is RE available, we use the amount to re-structure what the Weighted % of each type of financing would be. 40% of Debt and 60% of Equity is optimal, but after implementing RE, we should use 40% of Debt, 42% of RE and 18% of Common Stock. This has proved correct in every other problem.
Why are we not considering the use of RE in this problem? I can't wrap my head around it...