Question : Assertion-Reason Questions: Chapter - Sources of Business Finance
Questions : Equity Shares and Preference Shares
Assertion: Equity shares provide higher returns to shareholders due to the absence of fixed dividend obligations.
Reason: Equity shareholders receive preferential treatment in dividend distribution.
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: Assertion is true, but the reason is false.
Solution : The correct answer is (c) Assertion is true, but the reason is false.
Equity shares do not have any fixed dividend obligations. This means that companies are not obligated to pay dividends to equity shareholders. However, if a company does decide to pay dividends, equity shareholders are typically the last group of shareholders to receive dividends. This is because preference shareholders have a preferential right to receive dividends.
Despite the fact that equity shareholders receive dividends after preference shareholders, equity shares still have the potential to provide higher returns to shareholders. This is because equity shareholders have the potential to benefit from capital appreciation. Capital appreciation is the increase in the price of a company's stock.
The reason for the assertion is false because equity shareholders do not receive preferential treatment in dividend distribution. In fact, equity shareholders are typically the last group of shareholders to receive dividends, if at all.
The assertion is true because equity shares have the potential to provide higher returns to shareholders due to the absence of fixed dividend obligations. This means that companies are not obligated to pay dividends to equity shareholders, which frees up more cash that can be reinvested in the business or used to pay down debt. This can lead to higher growth and profitability, which can ultimately lead to higher stock prices and higher returns for equity shareholders.
