Question

which of the following statements about the characteristics of debt and equity is false?
they can both be short - term financial instruments.
they both enable a corporation to raise funds.
they can both be long - term financial instruments.
they both involve a claim on the issuers income.

Explanation:

• Analyze each option:
• Option 1: Equity (like common stock) is typically a long - term instrument as it represents ownership with no fixed maturity. Debt can be short - term (e.g., commercial paper) or long - term (e.g., bonds). So equity is not a short - term financial instrument, making the statement "They can both be short - term financial instruments" false.
• Option 2: Both debt (e.g., bonds, loans) and equity (e.g., issuing stocks) are used by corporations to raise funds. This statement is true.
• Option 3: Debt can be long - term (bonds) and equity is long - term (stocks), so they can both be long - term. This statement is true.
• Option 4: Debt holders have a claim on the issuer's income (interest payments) and equity holders have a claim on residual income (dividends, capital appreciation from profits). So they both involve a claim on the issuer's income. This statement is true.

Answer:

A. They can both be short - term financial instruments.