Capital Rationing Assignment Help

Posted on May 5, 2017

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Restricting the amount of new projects or investment that a company undertakes is called capital rationing. From this a company is able to choose only the investment that is most profitable for the capital investment decision. It is an attempt made by companies to limit the cost of their investment. It is a process in which a limited capital is apportioned to different projects in such away that the wealth of the shareholders is maximized. Capital Rationing is used to regulate the capital expenditure when the capital is in limited supply. It is implemented when the past returns of an investment of companies are lower than expected. Capital Rationing Assignment Help provides notes on every topic related to capital rationing.

 

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Types of Capital Rationing, Advantages and Disadvantages

     

  • The two types of capital rationing explained by Capital Rationing Assignment Help are

 
• Hard Capital Rationing- It arises when a company faces problems in raising additional funds through equity or debt. It leads to shortage of capital to finance the projects to be undertaken by the company in future. It is also known as external rationing. Companies which use hard capital rationing must follow a strict capital budget to avoid any financial problems in future. Here, the capital is restricted by the factors that are external to the company.
 
• Soft Capital Rationing- It is also known as internal rationing. It arises due to the internal policies of a company. Under this, the restrictions imposed by a company on the amount of funds to be invested in projects can be altered in future. Thus it is called soft rationing. It is implemented on department basis.

     

  • The advantages of capital rationing given in Capital Rationing Assignment Help are

 
• Optimum utilization of resources.
• The projects with lower return on capital are eliminated and investment is made only in projects in which the expected return is high.
• It helps in managing the projects efficiently by restricting the number of active projects.
• It helps in having sufficient finances for tough times and thus it ensures more stability and the stock price of a company is also rises as a result.

  • The disadvantages of capital rationing given in Capital Rationing Assignment Help are

• Besides restricting the budget, capital rationing also restricts the cost of capital of the projects that are shortlisted. For this the calculation of cost of capita has to be very accurate as any error would result in selecting the project which is less profitable.
• As all profitable projects are not accepted, the maximum value creation is not maximized.
• It leads to the selection of only small projects.
• Capital rationing does not consider intermediate cash flows arising from a project.
 

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