Question

If a corporation has limited capital to use for project investment, but it has more projects than the available capital will support and these projects will earn above the cost of capital, should it ration capital (to do fewer projects) or borrow (to do all projects)? Explain your answer.

Answer 1

We need to look at 2 things.
Financial and non- financial factors.
The financial will recommend to invest in all projects by borrowing the capital and earn a return of more than cost of capital.

The important non- financial factor to be consider here is timing.
If the economy is doing good and there is fast growing GDP. The financial system is good. The political situation is stable. The projects are of relatively short period (Not long term projects like 5 or more years). The company management is good. The current debt to equity ration. The industry the company is in and if the Industry is performing well.

If majority of the above answer is positive then borrow and invest.

If the answers is negative. Then be cautious and do not take more debt
That is ration capital and invest in fewer projects. Otherwise,
The company can fall into debt trap.

They are many companies which failed in a similar manner in India. Which were doing great and continuously started borrowing money and due to non- financial factors the companies today are either backcrupt or verge of bankruptcy.

Example:
Too big to fail company: Suzlon India.

Recently failed comapies in similar situations.
DHFL, Cox and Kings.
(You can check there 1 year and 5 year share price, they are India companies listed in NSE and BSE).