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What is Capital Rationing?

What is Capital Rationing?

Capital rationing is restricted on the amount of new investments or projects undertaken by a company.There are two types of capital rationing. The first type of capital rationing is referred to hard capital rationing.This occurs when a company faces issues raising additional funds, either through debt or equity. The rationing arises from an external factors , and can lead to a shortage of capital to finance future projects. The second type of rationing is called  soft capital rationing or internal rationing. This type of rationing comes about due to the internal policies of a company. For example, company may have a high required return on capital in order to accept a project or self-imposing its own capital rationing.

Capital rationing is necessarily a management approach to allocate available funds across multiple investment opportunities.The combination of projects with the highest total net present value (NPV) is accepted by the company.



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