explain capital rationing -soft rationing with example - hard rationing with example

explain

capital rationing

-soft rationing with example

- hard rationing with example

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Expert Solution

Capital rationing is a term which denotes an act of placing restrictions on the amount of new investments or projects undertaken by the company.

It is a term to denote such a situation in which the business enterprise cannot accept all the project appraisal because of lack or constraints of capital or amount.

There are two type of capital rationing

Soft rationing is also known as internal rationing. This type of rationing comes due to internal policies of the company. A fiscally conservative vompay for example may have a high required return on capital to accept a project, self-imposing its own capital rationing.

Hard rationing is also known as external rationing. This occurs when a company faces difficulties in raising funds in the external equity market. Example : A company may be restricted from borrowing money to finance new projects because it had suffered downfall in its credit rating. Thus in such case it would be difficult for the company to finance the funds.

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