Asked by joseph sciotto on Apr 25, 2024
Verified
Trading on the equity (leverage) refers to the
A) amount of working capital.
B) amount of capital provided by owners.
C) use of borrowed money to increase the return to owners.
D) number of times interest is earned.
Equity (Leverage)
The amount of funds contributed by owners (shareholders) plus the retained earnings (or losses). It can also refer to the use of debt to acquire additional assets.
Borrowed Money
Funds that an individual or entity obtains from another party under the condition of future repayment with interest, which can be used for various purposes.
- Understand the concept of leverage (trading on equity) and its impact on shareholder returns.
Verified Answer
AK
Ankita Kambli5 days ago
Final Answer :
C
Explanation :
Trading on the equity, also known as leverage, refers to the use of borrowed funds to increase the return to owners. This means that the company is using debt to finance its operations and investments, which can magnify returns for shareholders in good times but can also increase risk in bad times. It is not related to the amount of working capital or capital provided by owners, and it is also not a measure of how many times interest is earned.
Learning Objectives
- Understand the concept of leverage (trading on equity) and its impact on shareholder returns.