General Studies · Capital Structure and Financial Leverage
Given below are two statements: one is labelled as Assertion A and the other is labelled as Reason R. Assertion A: Positive trading on equity results in an increase in Earnings Per Share (EPS) for equity holders even if the Return on Investment (ROI) is lower than the after-tax cost of debt. Reason R: Trading on equity involves using fixed-cost sources of capital to amplify returns because the surplus earned on borrowed funds, over and above the interest cost, belongs to the equity shareholders. In the light of the above statements, choose the most appropriate answer from the options given below:
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Both A and R are correct and R is the correct explanation of A
- 2Both A and R are correct but R is NOT the correct explanation of A
- 3A is correct but R is not correct
- 4A is not correct but R is correct✓
Correct answer
A is not correct but R is correct
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