This lesson examines the theory and practice of capital structure, linking funding decisions to the overall cost of capital.

7.1. The Theory of Capital Structure

The concept of an optimal capital structure—the mix of debt and equity that maximises firm value—is a core concept. Key theories explore how tax benefits of debt are balanced against the costs of financial distress . The ACT syllabus requires candidates to “discuss appropriate capital structures for the organisation and calculate the cost of capital, using a range of appropriate practical models and techniques” .

7.2. The Weighted Average Cost of Capital (WACC)

WACC is a weighted average of the cost of debt and the cost of equity. It represents the overall required return for the firm’s investors and is used as the discount rate in discounted cash flow (DCF) analysis. The syllabus includes “Weighted Average Cost of Capital (WACC)” as part of its indicative content .

7.3. ESG and Capital Structure

Increasingly, Environmental, Social, and Governance (ESG) factors are influencing capital structure decisions and the cost of capital. The ACT syllabus examines “trends and developments in the funding markets, including ESG” .