ACCA Financial Management (F9) Certification Practice Exam

What does prior charge capital refer to?

1. Equity financing only

2. Long-term investments

3. Capital that has priority for interest or dividends

4. Short-term liabilities

The correct answer is: Capital that has priority for interest or dividends

Prior charge capital refers to financing that has a claim over the assets and earnings of a company before other types of capital, particularly equity. This usually includes instruments such as debentures or preference shares that must be paid interest or dividends before any payments are made to equity shareholders. The priority in receiving payouts makes it less risky for investors, and because of this priority, it is often seen as a safer investment compared to equity financing. Furthermore, the term 'prior charge' indicates that these investors or creditors have a "first claim" on the company's financial resources. In contrast, equity financing does not typically have this priority and is last in line when it comes to distributions. Long-term investments and short-term liabilities also do not inherently carry this priority status. Thus, prioritization for interest or dividends characterizes prior charge capital, making the choice accurate in the context of this question.