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#1
By Ahmed Akber
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Hard
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Fact Checked
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23 Aug 2026
Why does a firm’s cost of equity typically rise as its debt-to-equity ratio increases?
💡 Explanation:According to Modigliani-Miller Proposition II, as a firm increases its leverage, the financial risk to equity holders rises because debt has a prior claim on cash flows, leading shareholders to demand a higher return.
#2
By Ahmed Akber
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Easy
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Fact Checked
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19 Jul 2026
What principle states that money available now is worth more than the same amount in the future due to its earning potential?
💡 Explanation:The Time Value of Money (TVM) concept suggests that money held today has greater value than the same amount later because it can be invested to earn interest.
#3
By Rabia Anum
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Medium
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Fact Checked
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13 Jul 2026
When a firm’s cost of capital exceeds a project’s Internal Rate of Return (IRR), what is the status of the Net Present Value (NPV)?
💡 Explanation:The Internal Rate of Return (IRR) is the discount rate at which NPV equals zero. If the cost of capital (the required rate of return) is higher than the IRR, the project's discounted inflows will be less than the initial outlay, resulting in a negative NPV.
#4
By Kalsoom Tahir
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Medium
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Fact Checked
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15 Jun 2026
Which risk is inherent to the entire market and cannot be eliminated through portfolio diversification?
💡 Explanation:Systematic risk, also known as market risk, is caused by macroeconomic factors that affect all securities and cannot be mitigated by simply adding more assets to a portfolio.
#5
By Kalsoom Tahir
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Medium
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Fact Checked
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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.
#6
By Kalsoom Tahir
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Medium
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Fact Checked
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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.
#7
By Rabia Anum
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Medium
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Fact Checked
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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.
#8
By Ahmed Akber
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Medium
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Fact Checked
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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.
#9
By Ahmed Akber
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Medium
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Fact Checked
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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.
#10
By Ahmed Akber
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Medium
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Fact Checked
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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.
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