Read the following statements and mark the correct answer.

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.

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

The correct answer is option 4- Assertion (A) is not true but Reasoning (R) is correct.

Assertion: Trading on Equity refers to the trading in own equity shares by a company. This is not true as  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 Return on Investment and cost of debt increases the EPS. This is a situation of favourable financial leverage. This is true. 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.

So, the correct answer is assertion is not correct and reasoning is correct.