(a) How does trading on equity increase the return on equity shares? Explain with an example.
Answers
Answer:
By means of trading on equity, as mentioned before, companies expect to increase their income by acquiring new assets, and subsequently generating returns that are higher than the debt they procure. Thereby, that excess income increases shareholder's earnings per share (EPS).
Explanation:
Trading on equity is a financial process in which debt produces gain for shareholders of a company. Trading on equity happens when a company incurs new debt using bonds, loans, bonds or preferred stock. ... ' When the borrowed amount is modest, the company is 'trading on thick equity. '
Any fluctuation in earnings before interest and taxes (EBIT) is magnified on the earnings per share (EPS) by operation of trading on equity larger the magnitude of debt in capital structure, the higher is the variation in EPS given any variation in EBIT.
An equity trade can be placed by the owner of the shares, through a brokerage account, or through an agent or broker; again, similar to stock trading. The key difference between equity trading and stock trading lies in their investment options and management firms.
Trading on equity refers to the use of fixed cost sources of finance such as debentures and preference share capital in the capital structure so as to increase the return on equity shares. There are two conditions to use trading on equity:
(i) The rate of interest on loan/debentures should be less than the rate of Return on Investment.
(ii) The interest should be deducted from profit before tax.
mark me as brainliest