Question : Assertion-Reason Questions: Chapter - Sources of Business Finance
Questions : Equity Shares and Preference Shares
Assertion: Equity shares provide higher potential returns compared to preference shares.
Reason: Equity shareholders are given preference in dividend payments.
Option 1: Both assertion and reason are true, and the reason is the correct explanation of the assertion.
Option 2: Both assertion and reason are true, but the reason is not the correct explanation of the assertion.
Option 3: Assertion is true, but the reason is false.
Option 4: Both assertion and reason are false.
Correct Answer:
Both assertion and reason are true, but the reason is not the correct explanation of the assertion.
Solution : The correct answer is (b) Both assertion and reason are true, but the reason is not the correct explanation of the assertion.
The assertion is true. Equity shares generally provide higher potential returns compared to preference shares. This is because equity shareholders have an ownership stake in the company and, if the company performs well, they can benefit from higher profits and potentially receive higher dividends.
The reason is not the correct explanation. The reason states that equity shareholders are given preference in dividend payments, but this is incorrect. Preference shareholders are given preference in dividend payments, meaning they receive their fixed dividend before any dividends are distributed to equity shareholders. Equity shareholders do not have a fixed dividend and are entitled to a share of profits after all liabilities and preferences, including preference share dividends, have been met.
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