Capital Rationing Question: Download Questions PDF
Explain what is the normal procedure followed for Capital Rationing?
The procedure which is adopted is that companies implement capital rationing in situations where past returns of investment were lower than expected. For example, suppose a company has a cost of capital of 15% but that the company has taken too many projects in their hands, out of which many are not finished. These incomplete projects cause the company's a drop in actual return on investment. Due to this reason, management decides to place a restriction on the number of new projects by raising the cost of capital for these new projects to such an extent so that company will not invest on large number of new projects. Starting with few new projects would give the company more resources to complete unfinished or existing projects.
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