Practicing Success
Assertion: With higher use of debt, the difference between RoI and cost of debt increases the EPS. This is a situation of favourable financial leverage. Reasoning: Companies often employ more of cheaper debt to enhance the EPS. Such practice is called Trading on Equity. |
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. |
Both Assertion (A) and reasoning (R) are correct and but R is not the correct explanation of A. |
The proportion of debt in the overall capital is also called financial leverage. Financial leverage is computed as D/E or D/(D+E) when D is the Debt and E is the Equity. With higher use of debt, the difference between RoI and cost of debt increases the EPS. This is a situation of favourable financial leverage. In such cases, companies often employ more of cheaper debt to enhance the EPS. Such practice is called Trading on Equity. |