Question

Assertion (A): Equity Shares bear the maximum risk and also get the maximum reward.

Reason (R): Dividend on equity shares will be paid only when profits are left after payment of fixed rate of dividend on preference shares. As such, dividend may not be paid every year but in some years they may be paid large dividend and they may be issued bonus shares also. Market value of equity shares may also increase to a great extent.

In the context of the above two statements, which of the following is correct?

Options

• Both (A) and (R) are correct and (R) is the correct reason of (A).

• Both (A) and (R) are correct but (R) is not the correct reason of (A).

• Only (R) is correct.

• Both (A) and (R) are wrong.

Answer 1

Both (A) and (R) are correct and (R) is the correct reason of (A).

Explanation:

Assertion (A) is true, Equity shareholders face the highest risk but also enjoy the highest potential rewards.

Reason (R) is also true, Equity dividends are residual after paying preference shareholders, and though not guaranteed, they can be high in good years. Bonus issues and increase in market value further add to rewards.