1. What is the difference between accounting profit and economic profit? How are they related to the concept of

opportunity cost?

- Accounting profit is the difference between total revenue and explicit costs, while economic profit is the

difference between total revenue and both explicit and implicit costs. Implicit costs are the opportunity costs of

using the firm's own resources. Therefore, economic profit reflects the true profitability of a project or a firm,

taking into account the alternative uses of the resources.

2. What is the difference between systematic risk and unsystematic risk? How can investors reduce their exposure

to each type of risk?

- Systematic risk is the risk that affects the entire market or a large segment of the market, such as changes in

interest rates, inflation, or political events. Unsystematic risk is the risk that affects a specific firm or a small

group of firms, such as changes in demand, supply, or management. Investors can reduce their exposure to

systematic risk by diversifying their portfolio across different asset classes, sectors, and countries. Investors can

reduce their exposure to unsystematic risk by diversifying their portfolio within a given asset class, sector, or

country.

3. What is the difference between net present value (NPV) and internal rate of return (IRR)? How are they used to

evaluate investment projects?

- NPV is the difference between the present value of cash inflows and cash outflows of a project, while IRR is the

discount rate that makes the NPV of a project equal to zero. Both NPV and IRR are used to evaluate investment

projects by comparing them with a required rate of return or a hurdle rate. A project is acceptable if its NPV is

positive or its IRR is higher than the hurdle rate.

4. What is the difference between capital structure and capital budgeting? How are they related to the goal of

maximizing shareholder wealth?

- Capital structure is the mix of debt and equity that a firm uses to finance its operations, while capital budgeting is

the process of selecting and allocating funds to long-term investment projects. Both capital structure and

capital budgeting are related to the goal of maximizing shareholder wealth by affecting the firm’s cash flows,

cost of capital, and risk.