trading on equity

This query is : Resolved

Share Report Follow Query Ask a Query

nisha

nisha (Querist)
Follow

09 May 2011 what is the meaning of trading on equity in simple terms???????please explain..... its urgent....

CA Gunjan Kedia

CA Gunjan Kedia (Expert)
Follow

10 May 2011 Hi Nisha,

In simple terms, trading on equity refers to the use of leverage to increase the profit available to equity shareholders. this is achieved bcoz cost of debt financing is less than the cost of equity financing.
take an example:
say cost of debt financing is 10%, whereas cost of equity is 16%.
now a co. has an EBIT of Rs. 50,000 & needs Rs. 100,000 capital. if it opts to raise this entire amt. thru equity of Rs. 10 face value, the entire profit of Rs. 50,000 gets distributed among 10,000 shareholders and each one gets Rs. 5.
however, if the co. opts to raise Rs. 60,000 thru debt and remaining thru equity, the position is as follows:
profit - 50,000
less: interest - 6,000 (10% on Rs. 60,000)
remaining profit - 44,000
now this 44,000 will b divided among 4,000 equity holders. thus each one will get Rs. 11

gud luck !!

Message likes : 1 times

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now

Join the CA Students WhatsApp Community for ICAI Updates, Trending Courses & Notes!

Similar Resolved Queries

Unanswered Queries

Popular
Recent

Trending Online Classes

Direct Tax Laws & International Taxation May 26,Sept 26 & Jan 27

CA Arvind Tuli

Enroll Now
Audit Fast Track Recorded Batch For May 26,Sept 26 & Jan 27

CA Aarti Lahoti

Enroll Now
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English

CA Bhanwar Borana & CA Shubham Keswani

Enroll Now

view all classess

Meet our CAclubindia PRO Members

office docs

Sasidhar B

ABHISHEK AGRAWAL

Akhila Ajayan

RATI MALU

Subscribe Now

trading on equity

Similar Resolved Queries

Trending Online Classes

Meet our CAclubindia PRO Members

Quick Links

Browse by Category

Latest Job Openings

Senior Executive

Manager- Finance and Compliance

GST CONSULTANT

GST CONSULTANCY

Accountant

CA Final

Article Assistant

Associate CA