Evaluation the capital structure: Equity and Debt

According to Myers (2001) addressed the capital structure is the mix of securities and financing sources used by corporations to finance real investment. And capital structure has focused the company's two main forms of financing - equity or debt, or a combination of both. Debt capital is the capital that a business raises by taking out a loan. It is a loan made to a company that is normally repaid at some future date. And the equity capital is money invested in a business by owners, stockholders or others who share in profits

From all sources of funds of a firm cannot be achieved using a single means of financing, instead of using a combination of various means of financing. Arnold (2008) claimed there are many ways to raising money of the listed company, and determine the optimal capital structure to seek to maximize the value of the company to achieve the company the lowest weighted average cost of capital. In the same way, as Titman and Wessels (1988) also explained that firms select capital structures depending on attributes that determine the various costs and benefits associated with debt and equity financing.

According to Sheikh and Wang (2011) point out the decisions concerning capital structure are imperative for every business organization. In particular, there are not many modern enterprise is wholly owned. Each enterprise may also need to take a variety of ways to raise the necessary capital from different sources.

A recent example of BBC news (2012) shows that in the credit crunch and the recession made the retailer Peacocks to have collapsed in recent years. A number of reasons have been cited for the failure, including the role of the Royal Bank of Scotland (RBS) during talks to restructure its debts. As this result, Peacocks overall debt stands at £750m. The debts became too much for Peacocks which went into administration after talks on restructuring part of the debt collapsed. RBS was one of the lenders which refused to pump any more cash into the business. The reason is banks could not see a way where Peacocks could get close to paying off this debt.

However, the Peacocks is not carrying out the debt financing，that it can continue to operate? It is having failed to restructure its total £750m debt, that has taken a huge interest, but all stores would continue to operate as usual. The reason of this result is Yorkshire-based fashion chain Bonmarche, part of the Peacocks Group, was bought for an undisclosed sum by private equity group Sun European Partners. The advantage of equity capital is that, in contrast to debt, the money doesn't have to be repaid, and there's no interest to be paid (Anonymous, 2004). There are many factors affecting the capital structure, but different factors impact on the company, under its own characteristics to choose their own capital structure.

 The capital structure affects the value of the company? The capital structure is of special significance: firstly, improve the capital structure can increase corporate value and improve the efficiency and operational efficiency of financing; In addition, to help finance reform, including corporate bond market to establish and improve, and the financing system to facilitate investment and financing activities of the society as a whole, the rational allocation of financial resources, and promote long-term economic growth. At present, the capital structure aroused much concern because the capital structure as the value of the business.

It can be seen from the above in the capital structure is to be expected corporate earnings, the cost of capital, financing risks, and property rights distribution system, a comprehensive summary of the results. The capital structure design is corporate financing process to seek a reasonable balance between the various elements of financial leverage, financing costs and financing risks. The Capital structure is reasonable or not largely determines the debt service and fund-raising capacity and future profitability.