Define Capital Rationing in details? and differentiate between accounting vs. Financial break-even?

Expert Solution

Capital Rationing:-

Capital rationing is the company take an action in order to place some restrictions on new projects cost. The primary objective of capital rationing is to ensure the amount of money invested in best use and the company will not run without money. In capital rationing the management allocate the fund various project there by increase company value. so the company accept only the project have net present value (NPV) high. Without capital rationing company invest heavily in asset. capital rationing help to company good return on project and there for good financial condition.

Differentiate between accounting break-even vs. Financial break-even :-

Accounting break even is help to know number unit sold in order to cover up cost and Financial break-even help to estimate earnings which EPS equal to zero.
Accounting break even is help to calculate zero operating margin and financial break even help to calculate zero net income
In accounting break even reqiure fixed cost , variable cost and cost per unit for calcuation and EBIT is taken as earnings in financial break even calculation.
Accounting break even is calculated (Total fixed cost / price per unit) -variable cost and financial break even calculated Preferred dividend / 1 - tax rate + interest expenses.

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