Trading on Equity

Trading on equity is an arrangement under which the financial management raise funds by issuing securities which carry a fixed rate of interest which is less than the average earnings of the company. This is done to increase the return on equity shares. shown that companies B and Care having higher rate of return because of use of borrowed capital along with equity capital.

Impact of Trading on Equaity

	A	B	C
Total Investment Equity Capital 10% Debentures	25 lac 25 lac       Nil	25 lac 15 lac 10 lac	25 lac 10 lac 15 lac
(a) Profit before Interest & Tax (PBIT) (b) Interest on 10% Debentures (c) Profit before Tax (a-b) (d) Tax (30%) (e) Profit after Tax (f) Equity capital (g) Rate of Retum on Share Capital (e/f)	5,00,000             Nil   5,00,000   1,50,000   3,50,000 25,00,000                   14%	5,00,000   1,00,000   4,00,000   1,20,000   2,80,000 15,00,000       18.67%	5,00,000   1,00,000   3,50,000   1,05,000   2,45,000 10,00,000        24.5%

For more help in Trading on Equity click the button below to submit your homework assignment