Jeff Company Purchased, as a Long- Term Investment, Common Stock

question 95

Multiple Choice

Jeff Company purchased, as a long- term investment, common stock of Garcia Company. During the current year, Garcia Company earned $4,000,000 and paid dividends of $1,000,000. Assume that Jeff Company owns 10% of the outstanding shares of Garcia Company. Garcia Company's net income will affect Jeff Company by:

• A) increasing cash and investments by $400,000
• B) increasing cash and stockholders' equity by $400,000
• C) increasing stockholders' equity and investments by $400,000
• D) None of these answers is correct.

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Definitions:

Disposable Income

After income taxes are taken out, disposable income represents the funds available to a household or individual for saving and spending purposes.

APS

Average Propensity to Save, which is the fraction of total income that is saved by an economy or individual.

Income

The financial gain received by an individual or entity, usually in the form of wages, salaries, or returns from investments.

MPC

Marginal Propensity to Consume, which indicates the proportion of additional income that a household is likely to spend on consumption rather than saving.