Explain whether the following statements are True or False (each statement carries 3 marks):

a. The value of a firm at a given point in time can be viewed as consisting of two terms, the value of current period earnings and the current interest payment.

b. The CAPM says that a stock with zero beta risk should have the risk-free interest rate.

c. There are two possible states in period 2. Your initial wealth is $500 and you will buy 10 shares of stock A and 5 shares of stock B in period 1. From this combination of shares you buy for the two stocks, in period 2, if state 1 arises, your wealth is $0 and if state 2 arises, your wealth is $1200. The price of a primary security on state 2 (a unit claim on state 2) is $24.

d. The transformation curve reflects use of unnecessary funds in the sense that the rational entrepreneur tends to waste resources.

e. Because the efficient market hypothesis holds, bubbles and crashes have been observed.