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#1
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29 Jan 2026
A company issues new stock to retire existing bonds. How does this affect its Debt-to-Equity ratio?
💡 Explanation:The Debt-to-Equity (D/E) ratio is calculated as Total Liabilities / Shareholders' Equity. When a company issues new stock (Equity uparrow), the denominator increases, and when it uses the proceeds to retire existing bonds (Liabilities downarrow), the numerator decreases. Both actions cause the ratio to fall. A lower D/E ratio indicates reduced financial leverage and typically lower financial risk.
#2
By TheQuizWire
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25 Jan 2026
Which capital budgeting method implicitly assumes that project cash flows are reinvested at the cost of capital?
💡 Explanation:The Net Present Value (NPV) method discounts future cash flows using the firm's cost of capital, thereby implicitly assuming that intermediate cash flows generated by the project can be reinvested at that same rate. The IRR method incorrectly assumes reinvestment at the IRR itself, which is often less realistic.
#3
By TheQuizWire
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22 Jan 2026
What is primarily used as the discount rate for a firm’s overall free cash flow in discounted cash flow (DCF) valuation?
💡 Explanation:The Weighted Average Cost of Capital (WACC) represents the overall cost of a company's financing, including both equity and debt, weighted by their proportions in the capital structure. Since the Free Cash Flow to Firm (FCFF) is cash flow available to all investors (both debt and equity holders), WACC is the appropriate rate to discount these cash flows back to the present value to determine the company's enterprise value in a DCF valuation. The Cost of Equity (Re), often calculated using the Capital Asset Pricing Model (CAPM), is only the required return for equity holders and is a component of WACC.
#4
By TheQuizWire
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18 Jan 2026
The primary capital budgeting decision rule for project acceptance requires the:
💡 Explanation:The Net Present Value (NPV) method is a core technique in financial management. The decision rule for an independent project is to accept the project if its NPV is positive (NPV > 0), as this indicates the project is expected to generate a return higher than the cost of capital and increase shareholder wealth. Option A is the rejection rule for IRR (IRR < Cost of Capital). Option B is a desirable outcome for the Payback Period, but it is not the universally preferred primary decision rule. Option D is incorrect as higher ARR is preferred, though ARR is often disregarded in favor of NPV/IRR.
#5
By TheQuizWire
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14 Jan 2026
If market interest rates rise, what is the effect on the price of existing fixed-rate bonds?
💡 Explanation:Bond prices and interest rates have an inverse relationship. When market interest rates rise, existing bonds that offer a lower, fixed coupon rate become less attractive to investors. To make them competitive in the secondary market, their price must fall, which effectively increases the bond’s yield (yield-to-maturity) to align with the new, higher market rates.
#6
By TheQuizWire
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11 Jan 2026
What is the primary function of a commercial bank as a financial intermediary?
💡 Explanation:Financial intermediaries, such as commercial banks, primarily function to bridge the gap between those with capital surpluses (savers/depositors) and those in need of capital (borrowers) by pooling deposits and extending loans. This process facilitates efficient capital allocation and liquidity in the economy.
#7
By TheQuizWire
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28 Dec 2025
Which financial market segment deals primarily with short-term debt instruments, typically maturing in one year or less?
💡 Explanation:The Money Market deals exclusively with short-term financial assets, such as Treasury bills, commercial paper, and certificates of deposit, which typically have a maturity period of one year or less. Its primary function is to provide liquidity for immediate cash needs. The Capital Market, conversely, handles long-term instruments like stocks and bonds.
#8
By TheQuizWire
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22 Dec 2025
The primary distinction of the Money Market is its focus on which type of financial instrument?
💡 Explanation:The Money Market is a segment of the financial market where instruments with a high degree of liquidity and very short maturities (typically one year or less) are traded, such as Treasury bills, commercial paper, and certificates of deposit. This contrasts with the Capital Market, which is designed for long-term instruments like stocks (equity) and bonds.
#9
By TheQuizWire
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15 Dec 2025
A firm has $500k in total assets and $200k in total liabilities. What is its Debt-to-Equity ratio?
💡 Explanation:The Debt-to-Equity Ratio is calculated as Total Liabilities divided by Total Shareholders' Equity. First, determine the Shareholders' Equity using the accounting equation: Equity = Assets - Liabilities. Equity = $500,000 - $200,000 = $300,000.
Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity = $200,000 / $300,000 ≈ 0.67.
#10
By TheQuizWire
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17 Nov 2025
In finance, the fundamental trade-off involves which two factors?
💡 Explanation:The 'Risk-Return Trade-off' states that the potential for higher returns generally comes with a higher risk of loss.
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