CBSE Class 12 Business Studies 2018 Outside Delhi set 1

Question : 13

Total: 32

The Return on Investment (ROI) of a company ranges between 10−12% for the past three years. To finance its future fixed capital needs, it has the following options for borrowing debt:
Option 'A': Rate of interest 9%
Option 'B': Rate of interest 13%
Which source of debt, 'Option A′ or 'Option B′, is better? Give reason in support of your answer.
Also state the concept being used in taking the decision.

Solution:

Option ' A ' is better.
This is because in this option, Return on Investment (10−12%) is higher than the rate of interest (9%).
The concept being used here in taking the decision is 'Trading on Equity'.
Trading of equity refers to the use of fixed cost sources of finance such as preference share, debenture and long term loans in the capital structure so as to increase the return on equity shares.

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