Question

‘Increase in profit earned by equity shareholders due to the presence of fixed financial charges like interest’ is referred to as :

• A. Capital structure
• B. Financing decision
• C. Return on Investment
• D. Trading on equity

Hint:

Trading on equity uses debt to magnify returns for shareholders when ROI exceeds interest costs.

Answer 1

The Correct Option is D

Trading on equity refers to the process of using fixed-charge capital (like debt or preference shares) to increase the return on equity shareholders. When a company uses debt financing, it pays fixed interest regardless of its profit. If the company earns more than this fixed cost, the remaining profits increase the earnings for equity shareholders. This technique can be beneficial in a growing and profitable firm, as it enhances shareholders’ returns. However, excessive use of debt can be risky in low-profit situations, as it increases financial obligations.
textbf{Final Answer:} (D) Trading on equity