Capital rationing implies that: Select one: A. funding resources exceed funding needs. B. funding needs exceed...

Capital rationing implies that:

Select one: A. funding resources exceed funding needs. B. funding needs exceed funding resources. C. funding needs equal funding resources. D. none of the above.

Expert Solution

Answer: B. funding needs exceed funding resources

whether it is management -adopted or forced by situation , the capital required for investment is inadequte to fund more than a specified amount involved of the investments--so some need to be left-out--- and those that are left out are the least profitable ones , given their cost .

Capital rationing is resticting the amounts to be invested in new projects.

Equal-times it is forced by inadequacy of funds at the disposal of the management , when they have to limit their investment , choosing the most profiatble ones.

Also, it is an internal decision of the management to ration the money available for investment , going by their previous returns, or cost of capital , or expecting a higher return so as to maximise wealth for shareholders. They do the NPV analysis of the investments' cash flows , calculate their NPV/IRR & decide to invest based on the rankings given for the 2 parameters.

When the company itself limits, it is called soft capital rationing , as it is then an internal policy decision.

When it happens due to the external factors, beyond the contrl of the company, to raise adequate funds ,it is called hard capital rationing , as the company ,then ,has no choice , but to rank & choose projects ,as said above.

In either case, it is the restrictions placed on the resources --in comparison to the funding needs of the projects.

Hence the ANSWER-- B

jeff jeffy answered 1 year ago

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