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Question
A company borrows a loan at 10% interest and amplifies the returns of its equity shareholders by earning an 18% return on investment.
The financial concept illustrated here is ______.
Fill in the Blanks
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Solution
The financial concept illustrated here is trading on equity.
Explanation:
Trading on equity refers to the use of borrowed funds (debt) at a fixed interest rate to increase the returns for equity shareholders.
In this case, the company borrows at 10% interest and earns an 18% return, meaning the extra return (above interest) benefits equity shareholders.
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