Question

6) Companies generally purchase investments in debt and equity securities a) to generate a return on excess cash until needed. b) to generate investment income. c) to meet strategic goals. d) all of the above

Answer 1

Answer:

Option D: All of the above

Explanation:

Option A is incorrect because all the three statements were correct. Generally most of the companies house the excess cash as investments in order to generate excess income from this idle cash.

Option B is incorrect because all the three statements were correct. The investments in profitable debt and equity securities create an additional source of income for the companies.

Option C is incorrect because all the three statements were correct. many companies invests cash in debt and equity securities to meet their strategic goals.

Option D is correct because all the three other statements are correct.

Other reasons for a company to invest in debt and equity securities are the following:

• As a safety cushion, to maintain a large enough liquid investment balance to tide the company over an emergency.
• To meet cyclical cash needs (for companies in highly seasonal businesses).
• To gain a return on idle investment
• To gain influence over the decisions of the company being invested in.
• To gain complete control over another company. When one company owns more than 50% of another company, the financial statements of the first company must combine the financial performance of the other company (its subsidiary) with its own performance as if the two companies were one single company.