Abstract:

Though the earnings per share is the most popular decision-making method of capital stucture introduced in all kinds of relevant textbooks, it is difficult to carry out such a method in practice due to its various deficiencies such as neglecting the cost of equity capital and operating irrational decision-making rules.Based on an analysis and estimaton of the earnings per share, this paper introcuces the marginal analysis into approaches of capital structural decision-making, and puts forward a new method-marginal income analysis.According to it, an enterprise sets to raise funds only if the marginal income of capital is greater than or equal to zero.Because of different costs of capital, equity financing and debt financing must satisfy their own required levels of marginal capital output.Under the precondition that the marginal capital output has reached a required level, the enterprise should choose a correct financing method and a capital structure flexibly, and combine factors such as its own debt ratio, cash flow and growth capacity, thus guaranteeing an increase both in its profit and shareholders' fortune.

Key words: capital structure, earnings per share analysis, marginal income analysis