Question

Trading on Equity .

• A. is always beneficial
• B. can be beneficial
• C. is never beneficial
• D. None of the Above

Answer 1

The correct option is B can be beneficial

In Trading on Equity, also known as financial leverage what happens is that the company uses its own equity capital as well as borrowed funds or only borrowed funds to increase its operational capacity. The management is certain that the increase in returns from the expansion would be more than the increase in cost.

For Example: A Ltd purchases an asset for $Rs.100000$ using amount raised from issue of debentures on which interest has to paid @ $10$% and the return from the asset is $15$% so the additional $5$% earned is due to Trading on equity hence the same is beneficial. But there might be cases where the asset is not able to make returns which is more than the interest payable and in such cases trading on equity would not be beneficial. Hence we can say that trading on equity is beneficial but it cannot be said that it would always be beneficial or it would never be beneficial.