Trading on equity means:
AIssuing more shares
BTrading securities on stock exchange
CUse of borrowed funds in capital structure to magnify returns to equity holders
DEquity dividend strategy
Answer & Solution
Correct answer: C. Use of borrowed funds in capital structure to magnify returns to equity holders
1. Trading on Equity = use of debt/preference (fixed-cost capital) to enhance equity returns.
2. When return on assets > cost of debt, ROE increases.
3. Magnifies risk as well as return — a double-edged sword.
_Source: ICAI BoS CA Inter Paper 6A, Ch 5 "Financing Decisions — Capital Structure", §3 — Financial Leverage_
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