23 November 2007
IN BUSINESS THE FUNDS ARE EITHER OUR OWN LIKE SHARE CAPITAL OR RESERVES OR ACCUMULATED PROFITS OR INTERNAL ACCRUALS. IF THE FUNDS ARE NOT OUR OWN , THEN IT IS A DEBT, EITHER SHORT TERM OR LONG TERM. THE RATIO OF OWN FUNDS AND LONG TERM DEBT IS CALLED DEBT EQUITY RATIO.DEBT AND EQUITY TOGETHER MAKE THE CAPITAL STRUCTURE. IF THE DEBT GENERATES MORE RETURN, THAN ITS COST,THE EXCESS OF THE RETURN GOES TO BENEFIT THE OWNER'S EQUITY,AS IT INCREASES RETURN ON EQUITY.THIS IS TRADING ON EQUITY OR BENEFITTING FROM BETTER RETURN ON DEFT FUNDS AS THIS BETTER RETURN IN TURN HELPS RETURN ON OWN FUNDS. TRADING ON EQUITY IS ALSO CALLED FINANCIAL LEVERAGE. PL. VISIT WWW.answers.com,where financial leverage is defined as follows. Financial Leverage, or the use of borrowed funds, particularly long-term debt, in the capital structure of a firm. Trading profitably on the equity, also known as positive (favorable) financial leverage, means that the borrowed funds generate a higher rate of return than the interest rate paid for the use of the funds. The excess accrues to the benefit of the owners because it magnifies, or increases, their earnings. R.V.RAO
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