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Placing limits on the amount of new investment undertaken by a firm, either by using a higher cost of capital, or by setting a maximum on the entire capital budget or parts of it.
What else can I help you with?
What is meant by ROCE?
return on capital employed
Should a corporation ration its capital when its projects earn more than the cost of capital?
A corporation should generally not ration its capital if its projects consistently earn more than the cost of capital, as this indicates that the projects are creating value and contributing positively to shareholder wealth. Rationing capital in such scenarios could lead to missed growth opportunities and reduced overall profitability. However, if there are constraints on available funding or if the corporation anticipates better investment opportunities in the future, it might consider rationing as a strategic choice. Ultimately, the decision should align with the company's long-term financial goals and market conditions.
What do you meant by prefernce share capital?
Preference share capital means share capital which have preference over all other kind of share capital in term of profit and clearance at the time of dissolution of business.
What decision criteria should managers use in selecting projects when there is not enough capital to invest in all available positive NPV projects?
Profitability index criteria can be used to select projects when a capital rationing situation exists, with the highest profititibility index from specified projects being the goal.
What is meant by efficiency continuum?
The efficiency continuum refers to capital markets. Within a capital market, if something is reasonable and efficient to the market, it is said to be on the efficiency continuum.
What does capital rationing assumes?
a limited amont of capital is available
What is hard capital rationing?
A capital budget to which a company must adhere. A company may engage in hard capital rationing if it has limited resources and has allocated them in such a way as to allow little or no room for error. A project that goes over budget under hard capital rationing may land the company in trouble.
Why did rationing start in world war 2?
Due to the Germans covering the sea this meant that Britain could not ship in any resources such as food. This meant that we were low on food and therefore rationing was compulsory.
What is internal and external capital rationing?
Internal capital rationing occurs when a company imposes its own limits on capital expenditures due to factors like budget constraints or management decisions, often prioritizing certain projects over others. External capital rationing, on the other hand, arises when a company faces restrictions in accessing external funds, such as loans or equity financing, due to market conditions or investor perceptions. Both types of rationing can impact a firm's investment strategy and growth potential.
How are projects selected under capital rationing?
on the basis of projects having higher npv
What is capital rationing?
The Act of putting restrictions on investing new capital requirements by making the availability dearer at the high rates of interest/discounting.
When hard capital rationing exist project may be accurately evaluated by use of what?
Profitability Index
What does the capital of America do?
The capital of any country is meant for administration. The capital of America is also meant for the same purpose.
What did Britain have rationing ww2?
The war meant that we couldn't safely import many products. With the limited amounts of produce available, rationing was the only way to make sure people didn't 'stockpile' items.
What effect does capital rationing have on the firm's value?
Capital rationing can negatively impact a firm's value by restricting its ability to invest in positive net present value (NPV) projects. When a firm cannot pursue all profitable opportunities due to limited capital, it may miss out on potential growth and returns, leading to a lower overall valuation. Additionally, capital rationing can force the firm to prioritize projects, potentially resulting in suboptimal investment decisions that do not maximize shareholder wealth. Ultimately, the inability to fully invest in valuable projects can hinder the firm's long-term growth prospects.
What is meant by the term capital cost?
the capital cost is the exact price
What is the process of capital rationing?
Capital rationing has to do with the acquisition of new investments. More to the point, capital rationing is all about the acquisition of new investments based on such factors as the recent performance of other capital investments, the amount of disposable resources that are free to acquire a new asset, and the anticipated performance of the asset. In short, capital rationing is a strategy employed by companies to make investments based on the current relevant circumstances of the company. Generally, capital rationing is utilized as a means of putting a limit or cap on the portion of the existing budget that may be used in acquiring a new asset. As part of this process, the investor will also want to consider the use of a high cost of capital when thinking in terms of the outcome of the act of acquiring a particular asset. Obviously, any responsible company will choose to employ strategies that support the productive use of disposable funds built within a capital budget. At the same time, it is important to understand what benefits can reasonably be expected from owing the asset in question. Since capital rationing is all about setting criteria that any investment opportunity must meet before the company will seriously entertain the purchase, many businesses choose this strategy as their guiding process for any acquisitions. Using the basic principles of the technique, a company can develop a list of standards that must be addressed before any capital purchase. If the standards are drafted in a manner that accurately reflects the current condition of the company, then there is a good chance the right types of investments will be considered. Some of the more important factors to consider as part of a productive capital rationing approach are the financial condition of the company, the long and short term goals of the business, and proper attention to daily operations. One of the benefits of capital rationing is that the approach helps to ensure that funds for basic operations are not diverted in order to take advantage of a so-called "can't fail" opportunity, which helps to maintain the stability of the business.
