longer term to maturity cannot be worth less than the other. e) In an MM world adjusted for corporate and personal taxes, if the term (1-to)(1-te) (1-to) is less than one then the firm should be all debt. Note to = corporate tax rate, te= personal tax rate on equity income, to = personal tax rate on debt income. f) An option provides flexibility to both the buyer and the seller g) Diversification of a portfolio reduces risk and in the limit, as diversification increases, risk approaches zero. h) Homemade dividends are a perfect substitute for corporate dividends. i) There is no difference between a forward contract and an option contract in the foreign exchange market. 1) In the CAPM, the expected return of a security cannot be less than the risk-free rate. 11. Most companies face risks that need to be managed. It has been argued that risk management entails decisions about outsourcing risk (or risk sharing) and decisions about contractual agreements to accomplish this. Evaluate carefully these various aspects of risk management