The effect of capital structure on a firm's liquidation decision, in particular refer to debt financing.

According to Arnold (2008) addressed that capital structure refers to the way a corporation finances its assets through some combination of equity, debt. In general, the higher the expected return, also can afford the higher cost of financing, that operational risks and requirements for financing low-risk firms tend to choose equity financing; As for the traditional enterprise, the operational risks is relatively lower, there are expected return is also lower. They generally choose the low cost of debt financing. “Financing a business through borrowing is cheaper than using equity” (Arnold, 2008, p.794).

Capital structure decisions: Which factors are reliably important? Funds are necessary conditions for enterprises in production and business activities, the business capital accumulation and to attract debt financing and equity financing, debt financing is an important channel for enterprises to raise funds to promote enterprise development has an important impact. Debt financing will bring the risk of the enterprise to a correct understanding of the risks of debt financing, and enhance risk awareness and the development of effective risk prevention countermeasures. Different leverage of financing depends on the different companies in different strategic decisions. Both have a huge impact on the company's business operation.

As the BBC news (2011) has reported that India's national airline has been making huge losses and is struggling to compete in a growing crowded market. India's second-biggest airline is about $1.2bn in debt and struggling to raise cash. The shares in the carrier dropped 19.1% in early trading on the Bombay Stock Exchange to a record low, before recovering to close at a 9.45% loss (BBC news, 2011). The carrier's problems have gone from bad to worse in recent months as it has found it difficult to raise fresh capital, resulting in reports of unpaid fuel bills and other dues. The Creditors have already asked the company to raise $159m in equity so that its debts can be restructured. The State Bank of India, the airline's biggest lender, has warned that it must come up with a credible business plan before any restructuring of its debts (BBC news, 2011). If can’t borrow the funds from the banks, the ailing state-run airline wants government money to help turn its fortunes around.

Does the source of capital affect capital structure? There are some types of debt financing structure, the proportion of different sources of debt on corporate operation. The Bank credit is the most important sources of funding of a debt. In most cases, banks are also the main representative of the creditor to participate in corporate governance, the ability of enterprises to interfere and to protect the creditor assets.

There are any negative effects of debt financing? Firstly, the debt financing is to increase the financial risk of the enterprise. For the debt financing must ensure that their investment is greater than the cost of capital, also which will appear the phenomenon of income over expenditure. Secondly, excessive liabilities weakened the re-financing capacity of the enterprise. That companies to over the debt, is leading to its debt burden is too heavy. The maturity of corporate debt, if not regularly full debt service, and will affect the credibility of enterprises, also reduces the re-financing capacity. In addition, the increase in debt financing and management of the operating costs of enterprises, affecting cash flow. Debt financing of enterprises must pay interest on schedule, so that on the one hand to increase the operating costs of enterprises.