Introduction
Understanding Capital Structure and Finance Costs is essential for ACCA F3/FA/FFA students because every business needs finance to start, operate, and grow. Choosing the right source of finance affects profitability, financial stability, and long-term business success.
In this lesson, based on the Kaplan Study Text, we explain the concepts in simple Nepali while also providing additional practical examples, exam techniques, and real-world insights to make the topic easier to understand.
📚 What Is Capital Structure?
Capital structure refers to the mix of equity and debt that a business uses to finance its operations and assets.
Every business must decide how much money should come from the owners and how much should be borrowed from external lenders.
A balanced capital structure helps a business grow while managing financial risk effectively.
💰 Sources of Finance
Businesses generally obtain finance from two main sources:
Equity Finance
Equity finance is money invested by the owners or shareholders.
Examples include:
- Ordinary Shares
- Preference Shares
- Retained Earnings (Reserves)
Unlike loans, equity does not normally require repayment, but shareholders expect returns through dividends and business growth.
Debt Finance
Debt finance involves borrowing money that must be repaid in the future.
Examples include:
- Loan Notes
- Loan Stock
- Bank Loans
Debt finance creates finance costs because interest must be paid regardless of business performance.
📈 Ordinary Shares
Ordinary shareholders are the owners of the company.
They usually have:
- Voting rights
- Variable dividends
- A claim on profits after all other obligations have been met
Their returns depend on how well the company performs.
⭐ Preference Shares
Preference shareholders receive priority over ordinary shareholders when dividends are distributed.
Key characteristics include:
- Fixed dividend rate
- Priority in dividend payments
- Generally limited voting rights
Preference shares combine features of both equity and debt.
🏦 Loan Notes and Loan Stock
Loan notes (or loan stock) represent long-term borrowings by a company.
Investors receive:
- Regular interest payments
- Repayment of the principal amount at maturity
These instruments are classified as debt and create finance costs for the business.
💸 Finance Costs
Finance costs mainly consist of interest paid on borrowings.
These costs reduce the company’s profit and are reported in the Statement of Profit or Loss.
Managing finance costs effectively is important for maintaining profitability.
💵 Dividends
A dividend is a distribution of profits to shareholders.
Types include:
- Ordinary Dividends
- Preference Dividends
Unlike interest on loans, dividends are paid from profits and are not treated as business expenses.
📊 Retained Earnings and Reserves
Instead of distributing all profits as dividends, businesses often retain part of their earnings.
These retained profits become reserves, which can be used to:
- Finance future expansion
- Strengthen financial stability
- Meet unexpected financial needs
🧾 Income Tax
Businesses are generally required to pay income tax on taxable profits.
Income tax is an important expense that affects the company’s net profit and financial performance.
Understanding where income tax appears in financial statements is useful for ACCA exams.
⚖️ Debt vs Equity – Easy Comparison
Equity Finance
Debt Finance
No repayment obligation
Must be repaid
Dividends are optional
Interest is compulsory
Shareholders become owners
Lenders do not become owners
No finance cost
Creates finance costs
Higher business flexibility
Higher financial risk
Equity Finance
Debt Finance
No repayment obligation
Must be repaid
Dividends are optional
Interest is compulsory
Shareholders become owners
Lenders do not become owners
No finance cost
Creates finance costs
Higher business flexibility
Higher financial risk
⚠️ Common Exam Mistakes
Students often:
- Confuse debt finance with equity finance.
- Treat dividends as finance costs.
- Mix up preference shares and loan notes.
- Forget that interest is an expense but dividends are not.
- Misunderstand the role of retained earnings.
These common mistakes are discussed throughout the lecture.
📌 Exam Tips
- Understand the differences between equity and debt rather than memorizing definitions.
- Remember that interest reduces profit, while dividends are an appropriation of profit.
- Learn the characteristics of preference shares carefully.
- Practice identifying different financing sources in exam scenarios.
🎥 Watch the Full Video
👉 [https://youtu.be/FynAO7gRltM]
📺 Full ACCA FFA Nepali Playlist
👉 [https://www.youtube.com/playlist?list=PL6MketilTTIMVuMRUPkY1eAdlv_2d0HIY]
Complete the playlist to study every ACCA FFA chapter in Nepali, from concepts to Kaplan Exam Kit solutions.
📝 Conclusion
Chapter 12 introduces the different ways businesses raise finance and manage their capital structure. By understanding equity, debt, finance costs, dividends, reserves, and income tax, you’ll build a strong foundation for Financial Accounting and future ACCA papers.
⚠️ Disclaimer
This content is created for educational purposes only. ACCA, IAS, IFRS, and Kaplan are registered trademarks of their respective owners. This blog and video are not affiliated with or endorsed by ACCA, the IFRS Foundation, or Kaplan.
© Copyright Notice
All content, notes, explanations, and educational materials on this platform are the intellectual property of the creator. Unauthorized copying, reproduction, or redistribution is strictly prohibited.