Assertion: Trading on Equity refers to the increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest.
Reasoning: With higher use of debt, the difference between RoI and cost of debt increases the EPS. This is a situation of favourable financial leverage.
Answer & explanation
Correct answer: option 2
Trading on Equity refers to the increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest.
With higher use of debt, the difference between RoI and cost of debt increases the EPS. This is a situation of favourable financial leverage.
Thus, Both Assertion (A) and reasoning (R) are correct and but R is not the correct explanation of A.