Question $3$

$($a$)$ Within the framework of the single period consumption$-$investment

decision model illustrate and discuss the nature of the optimal

consumption$/$investment decision

$($i$)$ in the absence of capital markets, and

$($ii$)$ in the presence of capital markets. $[50\%]$

$($b$)$ How does the presence of capital markets make consumers better off?

Demonstrate using an example. $[20\%]$

$($c$)$ Given that internal sources of finance are not sufficient to achieve the

outcome illustrated in $($a$($ii$)),$ graphically show how external finance can

be used by financial managers who are interested in shareholder

wealth maximisation. $[30\%]$