Capital Rationing

[mei mei]

Can anyone advise what is the limitation & advantages of capital rationing ? Thanks in advance.

[Keyperson]

The following are my opinions :

Capital rationing is a situation but not a method or technique, so there is no limitation or advantage.

In fact, capital rationing is a situation in which a company has limited amount of capital to invest in potential projects, so company has to compare all potential projects with one another in order to allocate the capital available most effectively.

There has 2 kinds of capital rationing, there are hard capital rationing & soft capital rationing.

Soft capital rationing is brought about by internal factors (eg. management refuse to issue new share due to it will lead to a dilution of EPS)

Whereas hard capital rationing is brought about by external factors (eg. Bank refuse to borrow money to company due to some reasons)

The limitation & advantage of capital rationing is not on the syllabus. However a discussion of the reasons for capital rationing may be test on the exam.

[Poonam]

Hi,

The above would help you in understanding capital rationing.
For understanding the concept of hard and soft rationing in details you can refer F9 Study text.

Thank & Regards
Poonam