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How does trading on equity affect …

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How does trading on equity affect the choice of structure of a company? explain with the help of a suitable example

Posted by Sonia Sangma 8 years ago

CBSE > Class 12 > Business Studies

2 answers

Rohan Goyal 8 years ago

Sorry debt more comparison to equity(1st point of effect of trading on equity)

Rohan Goyal 8 years ago

Trading on equity refers to situation in which company includes more debt so that earning per share increases. Effect of trading on equity- 1.There will be more debt in comparison to debt 2.debt equity ratio or capital structure include debt more Example-company has debt-4000000 Equity shares capital-1000000(100000 equity shares@10each) Interest on debt-10 percent Tax-30% EBIT-1000000 SOLUTION-EARNING AFTER INTERST=EBIT-INTERST =1000000-400000=600000 Earning after tax=earning after interst-tax =600000-180000=420000 EPs=420000/100000=4.2 It states that more debt will result more earning per share but only if return on investment is more than interest on debt.

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