What is Trading on Equity or Capital Gearing?

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Solution

Trading on equity means taking advantage of equity base. On preference shares and debentures the company pays a fixed rate of return and if this rate is less than the company's normal rate of return or earning. then the equity shareholder will enjoy an advantage in the form of additional profit. This is called Trading on Equity.

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Is return on investment an important determinant of a company's ability of trading on equity? State true or false.

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