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Answer (C) is correct . The current optimal capital structure is 40% debt and 60% equity. The $3 million to be retained from earnings in the coming year represents the equity portion of the maximum new capital outlay. To retain the optimal capital structure, $2?million of debt must be added to the $3 million of retained earnings. Hence, the maximum capital expansion is $5 million.

Answer (A) is incorrect because Two million is the amount of debt that must be added to maintain the optimal structure.
Answer (B) is incorrect because Three million is the amount of earnings retained.
Answer (D) is incorrect because The amount of $5 million can be calculated.