Question

Trading on equity takes place ____________ .

• A. When capital other than that of equity shareholders is also employed
• B. Only when equity capital is employed
• C. Only when debenture funds are employed
• D. When profits are ploughed back

Answer 1

The correct option is A When capital other than that of equity shareholders is also employed

Trading on Equity sometimes reffered to as Financial leverage. Trading on Equity occurs when a corporation uses bonds, other debt and preferred stock to increase its earnings.

The earnings in excess of the interest expense will increase the earnings of the corporation's stockholders. The increase in earnings indicate that the corporation was successful in trading on equity.