1.Trevor and Simone have taken early retirement. Their retirement package has lefteach of them with a lump sum that is substantial, but they have decided to start abusiness together in the hope of accumulating significant wealth before reachingnormal retirement age in eight to ten years.

They have identified an opportunity to import consumer electronics from the Far East.They have established that there is a substantial niche market in the UK for productssuch as mobile phones and tablet computers that are produced for the Chinese marketand which are rarely exported.

Trevor and Simone have negotiated the exclusive UK rights to import a new line ofproducts that is presently in the final development stage. They have a few months toestablish their company and to ensure that all of their distribution lines are in place.

Their retirement payments will only provide approximately 60% of their fundingrequirements. They are unsure whether to raise additional funds by inviting investorsto become minority shareholders in this venture, or to seek a bank loan, or acombination of the two.

(i) Discuss the relative merits of the bank loan or additional equity from minorityshareholders for Trevor and Simone's company. [10marks]

(ii) Discuss the difficulties associated with determining the optimal gearing levelfor Trevor and Simone's company. [10marks] [Total 20marks]

At the end of each year an independent organisation ranks the performance of the unit trusts invested in a particular sector, and classifies them into four quartiles (with quartile 1 being the best performer). Past experience has shown that, at the end of each year, a fund will either remain in the same quartile or will move to a neighbouring quartile. In fact, there is a probability 1-20 that a fund will remain in the same quartile and, where upward or downward movements are both possible, these are equally likely. However, it has been found that a fund that has remained in the top or bottom quartile for two consecutive years has a probability of 1-B (B