BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Trading on equity
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Trading on debt
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Interest on equity
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Interest on debt
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Detailed explanation-1: -Trading on equity is also called financial leverage. Both these terms signify that a corporate body leverages its financial standing to procure debt and enhance the earnings of shareholders.
Detailed explanation-2: -Trading on equity means the use of fixed cost sources of finance such as preference shares, debentures and long-term loans in the capital structure, to increase the return on equity shares. This is also known as financial leverage.
Detailed explanation-3: -Financial leverage is also known as leverage, trading on equity, investment leverage, and operating leverage.
Detailed explanation-4: -Trading on Equity Meaning-Trading on equity means using the borrowed capital to generate revenue that boosts the profits of equity shareholders, i.e., to make the profits by investing in the debt higher than the loan’s interest costs. Financial leverage also refers to trading on equity.
Detailed explanation-5: -’Trading on equity’ is called so because the company gets its loan amount from the creditors based on its equity strength. Companies usually borrow funds at favourable terms by taking advantage of their equity.