Final answer:
The question relates to how Green Capital's cost of equity would change if it adopted a new target capital structure with equal parts debt and equity. Without more information, we cannot compute the precise new cost of equity, but it is generally expected to increase with higher leverage.
Step-by-step explanation:
The student is asking about the change in the cost of equity when a company's capital structure shifts to a 50/50 mix of debt and equity from a debt-equity ratio of 0.60. The cost of equity might change due to the altered financial risk posed by an increased debt burden.
To determine the new cost of equity, the Modigliani-Miller theorem and the assumption about the market being perfect could be used, which suggests that a firm's value is unaffected by how it is financed. However, in a practical world, this theorem doesn't account for taxes, bankruptcy costs, and agency costs, all of which can affect the cost of capital. As the leverage (proportion of debt in financing) of a company increases, so typically does the cost of equity, due to the higher risk perceived by investors for providing equity financing to a more indebted company.
We cannot calculate the exact new cost of equity without more information about the relationship between debt levels and equity cost—a concept typically illustrated by the company's Hamada Equation or any similar measurement. The new cost of equity would be influenced by the company's beta, debt levels, and the risk-free rate, among other factors.