A company's earning before interest and tax is Rs. 7 lac. It pays 10% interest on its debt. Total investment of company is Rs. 50 lac. Name the concept related to this.

Trading on equity

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Debt Effect

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Trading on shares

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None of the above

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Solution

The correct option is A
Trading on equity

The concept is leverage effect or trading on equity.

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A company's earning before interest amd tax is Rs. 7 lac. It pays 10% interest on its debt. Total investment of company is Rs. 50 lac. Advise company whenever it should included debt or equity to raise its capital.

Q. A company's earnings before interest and tax is Rs. 7 lakh. It pays 10% interest on its debt. Total investment of company is Rs. 50 lakh.
(a) Advise company whenever it should include debt or equity to raise its capital.
(b) Name the concept related to this.
(c) Will the company's decision to raise funds from debt or equity will change if company's EBIT becomes 3 lakh.

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