Effect of Capital Rationing Homework Help

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Capital Rationing is a way of putting restrictions on the amount of new investments and projects which a company undertakes. This motive is achieved by imposing a higher cost of capital for consideration of investment or by setting a ceiling on specific portions of a budget. If a company has had lower returns for an investment in the past then it might want to implement capital rationing. Capital Rationing is of two types- Hard capital Rationing and Soft capital rationing (internal rationing). Hard capital Rationing occurs when a company has issues generating additional funds either through equity or debt, which occurs due to an external need to reduce spending, which can lead to shortage of capital to finance future projects. Soft capital rationing occurs due to internal policies of a particular conservative company which may have a high required return on capital in order to accept a project which in return self imposes it’s own capital. Capital Rationing can be difficult to understand at ones, therefore follow Effect of Capital Rationing Homework Help for better understanding.
 

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Effect of Capital Rationing (Advantages and Disadvantages)

 
The advantages and disadvantages of capital rationing explained in Effect of Capital Rationing Homework Help are
 
• Advantages: Capital Rationing is very important since it introduces a sense of strict budgeting for the corporate resources of a company. And when a situation of injunction of capital arises in form of more borrowings or stock issuance capital then the resources are properly managed and are invested in profitable resources. It prevents the wastage of resources by tactful investment and not by careless investment in each and every new project which comes along. It also ensures less number of project selections by imposing capital restrictions which helps in keeping active projects’ number in control and manages them well. Capital Rationing makes it possible for the company to know and invest in projects where they can get high expected returns and hence can eliminate projects which would give lower returns. Capital Rationing helps in generating adequate finances for adverse situations and ensures greater stability and an increase in stock price of the company. For more information on capital rationing kindly refer Effect of Capital Rationing Homework Help
 
• Disadvantages: A theory called capital markets theory states that all the projects that add to company’s value and increase the shareholders’ wealth should be opted for investment. But by following capital rationing this rule is violated since it allows investment in certain projects only. Capital Rationing places certain selective criteria over the cost of capital of shortlisted projects for which there has to be accurate calculation of cost of capital and any mistake in accomplishing so would result in selection of a less profitable project. Effect of Capital Rationing Homework Help would make the theory of capital rationing and its effects very easy to grasp.
 

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