The correct answer is: A. Trading on equity.
Financial leverage is the use of borrowed money (debt) to finance the purchase of assets in the hope of generating a higher return on investment than the interest rate paid on the debt. This is also known as trading on equity, because the company is using its equity (the money that its owners have invested in the company) to borrow money.
When a company uses financial leverage, it is increasing its risk. This is because if the company’s assets do not generate enough income to cover the interest payments on the debt, the company will have to use its equity to make up the difference. This can lead to the company going bankrupt.
However, if the company’s assets generate more income than the interest payments on the debt, the company will be able to use the extra income to increase its profits. This is why financial leverage is sometimes called “trading on equity.”
Options B, C, and D are incorrect. Option B, “Trading on debt,” is a type of financial leverage. Option C, “Interest on equity,” is not a term that is used in financial analysis. Option D, “Interest on debt,” is the amount of interest that a company pays on its debt.