The Return on Investment (RoI) of a company ranges between 10-12% for the past three years. To finacne its future fixed capital needs, it has the followings 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.

Explanation

The company should use Option A as in this case the Return on Investment (10-12 %) will be more than the cost of Debt (9%)
The concept being used in the above case in Trading on Equity.
The use of debt alongwith equity increases Earnings per share (EPS) . This use of fixed financial charge, i.e interset , increases the profit earned by shareholders. This concept is known as trading on equity.
If the company opts for OPtion A, it will lead to favourable trading on equity as in thi case ROI gt CoD, where
RoI- Return on Investment ( 10-12%)
CoD - Cost of Debt (9%)