On $31$st December $2022,$ Capital Bank Limited had the following balance sheet:

Assets K$$ Million Liabilities and Equity K$$ Million

Cash and other liquid assets $25,000$ Demand deposits $84,154$

Investments in securities $60,000$ Savings deposits

Loans $185,000$ Subordinate debt

Common equity

Total $272,500272,500$

The marginal cost of funds to ZED Bank Limited is:

Demand deposits $8\mathrm{.}5\%$

Time deposits $9\mathrm{.}5\%$

Savings deposits $10\mathrm{.}5\%$

Debentures $13\mathrm{.}8\%$

Common equity $25\mathrm{.}0\%$

REQUIRED:

a$)$ Compute the weighted$-$average marginal cost of funds for Capital Bank Limited.

b$)$ Describe why it is crucial to use the marginal cost of funds rather than the average

cost of funds when determining loan pricing.