There are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the options given below.

Assertion (A):  If the Debt to Equity Ratio is 4:2, the purchase of fixed assets of ₹100000 by taking long-term borrowing from the bank will increase the ratio.
Reason (R):  Machinery is a fixed asset and its purchase, therefore, does not affect Debt and Shareholder's Funds but it is purchased on Long-term Borrowing from the bank which increases Debt but does not affect Shareholders' Funds. Hence, the Debt to Equity Ratio will increase.

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

The correct answer is option 1- Both, Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A).

Assertion (A):  If the Debt to Equity Ratio is 4:2, the purchase of fixed assets of ₹1,00,000 by taking long-term borrowing from the bank will increase the ratio. THIS IS TRUE. Let us do it with an example-
Let us assume debt = ₹4,00,000 and equity = ₹2,00,000
Machinery purchases make debt to increase by ₹1,00,000 as it is purchased by long term borrowing.
There is no effect on equity.
So,debt- equity ratio = 5,00,000/ 2,00,000 = 5:2

Reason (R):  Machinery is a fixed asset and its purchase, therefore, does not affect Debt and Shareholder's Funds but it is on Long-term Borrowing from the bank which increases Debt but does not affect Shareholders' Funds. Hence, the Debt to Equity Ratio will increase. THIS IS TRUE.