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Question

What do you understand by the term 'trading on equity'?

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Solution

Trading on equity means the use of fixed cost sources of finance such as preference shares, debentures and long-term loans in the capital structure, to increase the return on equity shares. This is also known as financial leverage. It is advisable to use trading on equity when the Rate of Return on Investment is more than the Rate of Interest payable on debentures and loans.


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