Match List-I with List-II:
| List-I | List-II |
|---|---|
| (A) Trading on equity | (I) The proportion of debt in the overall capital |
| (B) Financial leverage | (II) The chance that a firm would fail to meet its payment obligations |
| (C) Floatation cost | (III) The expenses of a public issue of shares and debentures |
| (D) Financial risk | (IV) The rise in the profit of shareholders because of fixed financial charges like interest |
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A)-(IV), (B)-(I), (C)-(III), (D)-(II)
| List-I | List-II | Reason |
|---|---|---|
| (A) Trading on equity | (IV) The rise in the profit of shareholders because of fixed financial charges like interest | Trading on equity is the increase in profit of equity shareholders due to fixed financial charges. |
| (B) Financial leverage | (I) The proportion of debt in the overall capital | The share of debt in the total capital is called financial leverage. More debt means higher leverage. |
| (C) Floatation cost | (III) The expenses of a public issue of shares and debentures | Raising funds has a cost, called floatation cost. A public issue of shares and debentures needs considerable expenditure. |
| (D) Financial risk | (II) The chance that a firm would fail to meet its payment obligations | Financial risk is the chance of failing to meet payment obligations. It rises as the firm uses more debt. |
Financial leverage is the share of debt in the capital; trading on equity is the gain that this debt can bring to equity shareholders.
NCERT (2026-27 Edition): “Capital Structure … Debt is cheaper but is more risky for a business because the payment of interest and the return of principal is obligatory for the business. Any default in meeting these commitments may force the business to go into liquidation. There is no such compulsion in case of equity, which is therefore, considered riskless for the business. Higher use of debt increases the fixed financial charges of a business. As a result, increased use of debt increases the financial risk of a company. Financial risk is the chance that a firm would fail to meet its payment obligations. Capital structure of a company, thus, affects both the profitability and the financial risk. A capital structure will be said to be optimal when the proportion of debt and equity is such that it results in an increase in the value of the equity share. In other words, all decisions relating to capital structure should emphasise on increasing the shareholders’ wealth. The proportion of debt in the overall capital is also called financial leverage. …” “EBIT-EPS Analysis … Such practice is called Trading on Equity. Trading on Equity refers to the increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest. …” “8. Floatation Costs: Process of raising resources also involves some cost. Public issue of shares and debentures requires considerable expenditure. Getting a loan from a financial institution may not cost so much. These considerations may also affect the choice between debt and equity and hence the capital structure.” |