Business Arithmetic — Entrepreneurship STD 12 Commerce — Question

Trading on equity relates to a situation when the debt component is likely to provide higher rate of return on share capital. Debt and equity are the two sources of finances. Both have their own merits and demerits.
But when a mix of both is used wisely, the rate of return equity can increase. This is because the interest paid on the loan is deductible from earning before tax payment. The payment of dividend is only made after realizing the interest.