Question

In considering whether a company should invest in debt or equity securities of another company, which of the following statements is incorrect?

1. The company wants to make the best use of its excess cash to generate investment income.

2. Investment income consists of interest earned from equity securities and dividends earned from debt investments.

3. Investment income includes increases in the market value of debit or equity securities.

4. The excess cash that can be invested could be the result of temporary or seasonal business fluctuations.

Answer 1

The incorrect statement is that investment income consists of interest earned from equity securities and dividends earned from debt investments.

Step-by-step explanation:

The incorrect statement in this scenario is statement number 2: Investment income consists of interest earned from equity securities and dividends earned from debt investments. This statement is incorrect because investment income consists of interest earned from debt securities and dividends earned from equity investments, not the other way around.

When a company invests in debt securities, such as bonds, it will earn interest as income. On the other hand, when a company invests in equity securities, such as stocks, it will earn dividends as income. So, in the context of this question, statement number 2 is incorrect because it reverses the terms debt securities and equity investments in reference to interest and dividends.

Overall, the company wants to make the best use of its excess cash by generating investment income through the appropriate choice of debt or equity securities. Investment income can also include increases in the market value of these securities, and the excess cash available for investment can be the result of temporary or seasonal business fluctuations.