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Home Questions 6FUDH79BPV
Target Exam

CUET

Subject

Business Studies

Chapter

Financial Management

Question:

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.

Options:

Both Assertion (A) and reasoning (R) are correct and R is the correct explanation of A.

Both Assertion (A) and reasoning (R) are correct and but R is not the correct explanation of A.

Assertion (A) is true but Reasoning (R) is not correct.

Assertion (A) is not true but Reasoning (R) is correct.

Correct Answer:

Both Assertion (A) and reasoning (R) are correct and but R is not the correct explanation of A.

Explanation:

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.

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