Practicing Success
Practicing Success
CUET Preparation Today
| Assertion: Trading on Equity refers to the trading in own equity shares by a company. Reasoning: With higher use of debt, the difference between Return on Investment and cost of debt increases the EPS. This is a situation of favourable financial leverage. |
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. |
| Assertion (A) is not true but Reasoning (R) is correct. |
| 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. |
