Business firms are aware that raising funds through equity finance is expensive and also, financing through debt is risky. Firms need to find out the optimal level of both combination. Capital structure it self will not create shareholder wealth.
This clearly shows on Tui Travel PLC, which is the Europe's biggest travel group, formed by the merger of Tui AG in Germany and UK's Fist Choice in 2007. At its formation Tui Travel has taken £900m ($1.4bn) loan from Tui AG, which is at a quite low cost and low interest rate. However, in 2009 company announced to issue convertible bonds to refinance the loan of £900m, which the settlement took place in 2010. Until 2010 though the company was financed by debt it it was making losses continuously since 2008 till 2010. However after refinancing the loan by the issue of convertible bonds, even though it is highly costly, Tui travel reported a profit in 2011 £114m profit before tax.
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