What do you understand by the term trading on equity?
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Though Angel Pharma is making huge profits every year on a regular basis, it is not able to provide sufficient dividend to its shareholders. As a result, EPS remains low. Identify and explain the concept that can help to resolve the problem.
Trading on equity means the use of fixed cost sources of finance such as preference shares, debentures and long-term loans in the capital structure, so as to increase the return on equity shares. This is also known as financial leverage. It is advisable to use trading on equity when the rate of Return on Investment is more than the rate of interest payable on debentures and loans.