CBSE 2024, BS Set 2

Question

Read the following statements: Assertion (A) and Reason (R). Choose the correct alternative from the options given below:

**Assertion (A):** While taking dividend decision, the extent of retained earnings also influences the financing decision of the firm.

**Reason (R):** The firm does not require funds to the extent of re-invested retained earnings. A). Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A). B). Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A). C). Assertion (A) is true, but Reason (R) is false. D). Assertion (A) is false, but Reason (R) is true.

Edvaya · Accepted Answer

The correct answer is Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).. **Both A and R are true and R correctly explains A.**

**Assertion A is TRUE**: The dividend decision (how much to distribute as dividend) directly affects the financing decision. More retained earnings means less need for external financing; fewer retained earnings (more dividend paid) means more external funds need to be raised.

**Reason R is TRUE and explains A**: When retained earnings are reinvested in the business, the firm reduces its requirement for raising funds from external sources by that same amount. This is precisely why the extent of retained earnings influences the financing decision — the firm does not need external funds to the extent of re-invested retained earnings.

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Business Studies > Business Finance > Financial Management

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