📝 One-liners · 65 cards
FINANCIAL LEVERAGE OR TRADING ON EQUITY
What is financial leverage?
Financial leverage refers to the use of fixed-cost debt financing to magnify the returns available to equity shareholders, also known as trading on equity.
What is the primary objective of using financial leverage in a firm?
To magnify returns to equity shareholders using borrowed funds.
What does the term 'trading on equity' mean?
Trading on equity means using borrowed funds at a fixed rate of interest to earn a higher return on equity, thereby increasing earnings per share for shareholders.
What does 'trading on equity' specifically refer to?
Using debt capital to earn more than its interest cost.
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