Limitation of financial leverage

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Limitation of financial leverage

  1. 1. 2.Beneficial only to companies shaving stability of earning:-Trading on equity is beneficial only to the companies having stable and regular earnings. This is so because interest on debenture is a recurring burden on the company and a company having irregular income cannot pay interest on its borrowings during lean ye ar. 3.Increases risk and rate of interest:-Another limitation of trading on equity is on account of the fact that every rupee of extra debt increases the risk and hence the rate of interest on increasing. it becomes difficult for the company to obtain further debt without offering extra securities and higher rate of interest reducing their earnings.

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