Meaning And Definition Of Capital Rationing And Risk Factors In Capital Budgeting Assignment Help

Posted on March 23, 2017

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During capital budgeting the firm has to consider risk factors and prepared from the very beginning so that if there is any risk that may be minimise. Students face confusions for which Best meaning and definition of capital rationing and risk factors in capital budgeting assignment help service is providing a complete solution to their confusions.
Best meaning and definition of capital rationing and risk factors in capital budgeting assignment help service will step by step explain you the meaning of different topics.
 

The first thing we need to know is what is capital budgeting?

 

Capital budgeting is the process in which a business determines and evaluates potential expenses or investments that are large in nature. These expenditure and investments include projects such as building a new plant or investing in a long- term venture.
Now you may be wandering about the meaning of capital rationing. Capital rationing is the act of placing restrictions on the projects that can be undertaken by the company or the capital that can be invested by the company. This is accomplished by imposing a higher cost of capital for investment consideration or by setting a ceiling on specific portions of a budget. Companies adopt capital rationing in situations where past returns of an investment were lower than expected.
 

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There are two types of capital rationing:

 

  • Hard capital rationing-

it occurs when a company raises additional funds, either through equity or debt. Hard capital rationing arises from an external need to reduce spending and can lead to a shortage of capital to finance future projects.

  • Soft capital rationing-

It arises due to internal policies of a company. A fiscally conservative company may have a high required return on capital in order to accept a project, self- imposing its own capital rationing.
 

Risk factors:

 

it is other important part in capital budgeting as in this case the firm requires choosing the projects so that they have the minimum amount of risk. Every project has some amount of risk. Therefore, incorporation of risk factor in the discounting rate becomes crucial for project decision. Risk exists because of the inability of the decision maker to make perfect forecasts.
 

Best meaning and definition of capital rationing and risk factors in capital budgeting assignment help Service is providing you assistance regarding the topic which is going to help you in understanding the various facets of capital budgeting. There are different budgeting techniques which one needs to understand that a company is going to adapt to minimise risk.
 

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