Capital Rationing - P2 Flashcards
1
Q
What is capital rationing?
A
When insufficient funs are available to undetake all beneficial projects
2
Q
What is soft rationing?
A
Firms internally imposes a budget ceiling on capital expenditure
3
Q
What is hard rationing?
A
External constraints such as the inability to obtain funds
4
Q
What is the objective of capital rationing?
A
Maximisation of the total NPV of chosen projects cash flows at the cost of capital
5
Q
If the objective is to maximise shareholders wealth what should we use to decide what project to undertake?
A
NPV
6
Q
How do we rank projects in order?
A
Profitability index
NPV of project/Intitial cash outflows
7
Q
A
