Which among the following refers to the increase in profit earned by the equity shareholders due to the presence of fixed financial charges?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Trading on Equity
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Trading on Equity refers to the practice of using fixed-cost funds (like debentures, preference shares, or loans) in the capital structure so that the equity shareholders gain higher returns.
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This happens because when the company earns more than the cost of debt (interest), the surplus increases the earnings per share (EPS) of equity holders.