Which of the following involves increasing the proportion of debt and preference shares in total capital?

Trading on equity

The correct answer is option 1- Trading on equity.

Trading on equity involves increasing the proportion of debt and preference shares in total capital.

With higher use of debt, this difference between RoI and cost of debt increases the EPS. This is a situation of favourable financial leverage. In such cases, companies often employ more of cheaper debt to enhance the EPS. Such practice is called Trading on equity. Trading on equity refers to the increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest.