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    Capital Rationing

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    Bharath Kumar
    This document discusses capital rationing, which occurs when firms cannot invest in all projects that earn returns above the hurdle rate due to insufficient funds or unfavorable capital market conditions. There are two types of capital rationing: hard capital rationing, which happens when firms have many investment options but cannot pursue them due to a lack of funds or access to capital markets, and soft capital rationing, where firms self-impose restrictions on investment funds despite having the ability to raise capital. The document also notes that smaller, high-growth companies are more likely to face capital rationing and use internal rate of return to evaluate projects, while larger firms with more access to capital will use net present value.

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    Capital Rationing

    Uploaded by

    Bharath Kumar
    187 views9 pages
    This document discusses capital rationing, which occurs when firms cannot invest in all projects that earn returns above the hurdle rate due to insufficient funds or unfavorable capital market conditions. There are two types of capital rationing: hard capital rationing, which happens when firms have many investment options but cannot pursue them due to a lack of funds or access to capital markets, and soft capital rationing, where firms self-impose restrictions on investment funds despite having the ability to raise capital. The document also notes that smaller, high-growth companies are more likely to face capital rationing and use internal rate of return to evaluate projects, while larger firms with more access to capital will use net present value.

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    the presentation is about a topic in investment decision which is capital rationing

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    This document discusses capital rationing, which occurs when firms cannot invest in all projects that earn returns above the hurdle rate due to insufficient funds or unfavorable capital market conditions. There are two types of capital rationing: hard capital rationing, which happens when firms have many investment options but cannot pursue them due to a lack of funds or access to capital markets, and soft capital rationing, where firms self-impose restrictions on investment funds despite having the ability to raise capital. The document also notes that smaller, high-growth companies are more likely to face capital rationing and use internal rate of return to evaluate projects, while larger firms with more access to capital will use net present value.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    187 views9 pages

    Capital Rationing

    Uploaded by

    Bharath Kumar
    This document discusses capital rationing, which occurs when firms cannot invest in all projects that earn returns above the hurdle rate due to insufficient funds or unfavorable capital market conditions. There are two types of capital rationing: hard capital rationing, which happens when firms have many investment options but cannot pursue them due to a lack of funds or access to capital markets, and soft capital rationing, where firms self-impose restrictions on investment funds despite having the ability to raise capital. The document also notes that smaller, high-growth companies are more likely to face capital rationing and use internal rate of return to evaluate projects, while larger firms with more access to capital will use net present value.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 9

    Capital rationing

    Capital rationing occurs when a firm is unable to invest in projects


    that earn returns greater than hurdle rates.
    These sources are typically more severe for smaller firms and for
    firms seeking equity financing.
    There are two types of capital rationing
    1. hard capital rationing.
    2. soft capital rationing.
    Hard capital rationing: Occurs when firms has many options for investment but is unable
    to take them up either because of insufficient funds or because
    capital markets are not favourable.
    1.lack of standing in the market- cannot raise funds due to
    credibility issues.
    2. high flotation cost.

    Soft capital rationing: Occurs when firms has self imposed restrictions on funds
    allocated for fresh investments.
    Availability of funds or have the ability to procure the funds
    from markets but they do not do so
    Use retained earnings to foster growth

    Capital rationing and choosing a


    rule
    If a business has limited access to capital and has a
    stream of surplus value projects, it is much more likely
    to use IRR as its decision rule.
    Small, high-growth companies and private businesses
    are much more likely to use IRR.
    If a business has substantial funds on hand, access to
    capital and limited surplus value projects, it is much
    more likely to use NPV as its decision rule.
    As firms go public and grow, they are much more likely
    to gain from using NPV.

    Example 1
    Funds available for capital expenditure in a year are
    estimated at Rs. 2,50,000 in a firm. The profitability index
    (PI) with mutually exclusive investment proposals are:

    The following investment proposals along


    with their profitability index (PI) are:

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