Earning more income on borrowed money than the related interest expense increases the earnings for common shareholders and is termed trading on the equity.

Question

Quizplus · Accepted Answer

Trading on the equity is a strategy where a company borrows capital at a lower cost and invests it in projects or assets that generate higher returns than the cost of borrowing. This increases the earnings for common shareholders as they earn a higher return on their investment. Therefore, the statement is true.

Earning More Income on Borrowed Money Than the Related Interest