Yes, you can host as many sub-domains (or full domains) as you like.
Yes, that looks correct to me.
Your friend can now FTP in using that sub-domain and he’ll see his own home directory, together with the web accessable directory for his sub-domain.
Of-course, anything he places in that web accessable directory (with the same name as the sub-domain) will be accessable from the Internet. However, anything he places in his home directory is not web accessable.
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