Question

Trading on Equity takes place when:

1. Return on Investment is less than rate of interest on debt.
2. Return on Investment is more than the rate of interest on debt.
3. Company’s earnings are stable and regular to pay at least the fixed interest on debt.
4. Company has sufficient fixed assets to be kept as security with the lenders.

Which of the above statements are correct?

Options

• (i), (iii), (iv)

• (ii), (iii), (iv)

• (i), (ii), (iii)

• All are correct

Answer 1

(ii), (iii), (iv)

Explanation:

1. If ROI is less than the cost of debt, it leads to loss, not trading on equity.
2. Trading on equity works when ROI > Cost of debt, generating profits for shareholders.
3. Stable earnings ensure debt obligations are met.
4. Lenders require collateral for providing debt.