CMA Study Group

I was hoping someone could explain why the cost of capital for retained earnings only applies to the common stock rather than incorporating the other forms of capital. 

The management of a company has been reviewing the company's financing arrangements. The current financing mix is $750,000 of common stock, $200,000 of preferred stock ($50 par) and $300,000 of debt. The company currently pays a common stock cash dividend of $2. The common stock sells for $38, and dividends have been growing at about 10% per year. Debt currently provides a yield to maturity to the investor of 12%, and preferred stock pays a dividend of 9% to yield 11%. Any new issue of securities will have a flotation cost of approximately 3%. The company has retained earnings available for the equity requirement. The company's effective income tax rate is 40%. Based on this information, the cost of capital for retained earnings is

Correct answer was 15.4% and makes sense, but I am missing the logic. 

Because RE had been exhausted, and hence, the new issuance will be the marginal cost of capital. Therefore, when calculating the MCC cost of capital, RE should be excluded in this case.