Question

How does 'Trading on Equity' affect the Capital structure of a company? Explain with the help of a suitable example.

Answer 1

Trading on equity is basically finding that balance between debt financing and equity financing. So choosing equity financing for more than 50% and debt financing for the remaining or the other way around is bound to affect the capital structure.

This is also known as Gilt edge financing.

Choosing equity financing would require to give voting rights to the holders.

Debt financing wouldn't have the problem of ownership but interest payments can be a big problem if the cash inflow of the company isn't sufficient.