Introduction

Question 1

6 bullet points in introduction

Answer 1

Pikes capital rationing definition
Result (npv)
Modern finance theory expects
Pikes npv definition
Capital scarce internal and external
Essay outlines

Question 2

Pikes capital rationing definition

Answer 2

The process of allocating capital to projects where there is insufficient capital to fund all value creating projects

Question 3

Results (npv)

Answer 3

This results in the selection of only a subset of possible investment projects, even if others could yield a positive Net Present Value (NPV).

Question 4

Modern finance theory expects

Answer 4

According to modern finance theory, firms are expected to accept all positive NPV projects, as these contribute to shareholder wealth maximisation

Question 5

Pikes NPV definition

Answer 5

NPV is defined as the present value of the future net benefits less the initial cost (Pike 2018)

Question 6

Capital scarce - internal external

Answer 6

However in practice capital is often scarce due to both internal and external factors, which forces firms to make selective investment decisions.

Question 7

Essay outlines

Answer 7

This essay outlines the concept of capital rationing and critically evaluates the reasons firms often pass up positive NPV projects