What is Cost of Equity? – Meaning, Concept and Formula
February 12, 2025
Traditional economists are of the opinion that infrastructure is the heart of the economy. Empirical data clearly shows that given a choice, investors prefer to invest their money in countries whose infrastructure is more developed. Hence, it can be said that rapid infrastructure development is one of the most basic ways in which a country […]
In the previous articles, we have already studied open banking as well as banking as a service. Many people tend to get confused between the two and think that both the terms refer to the same business model. However, this is not the case. Open banking is more of a technical term that is used […]
There is a common saying in the investment markets that “In the short run, the markets are a voting machine whereas, in the long run, they are a weighing machine.” This saying is often said in order to emphasize the role of long term investment. People with short term goals often fail to perform well […]
Retail investors across the world do not have a high level of knowledge when it comes to money markets. This is because of the fact that money markets have been largely invisible to retail investors. For a significant amount of time, money markets have only been used by large corporations, banks, and other entities to […]
What the Resignation of Urjit Patel Means for the Corporate Regulator Tussle in India Recently, in India, the RBI or the Reserve Bank of India and its former governor, Urjit Patel, were in the news for their resistance to encroachment on their powers by the Government of India. Separately, the RBI and Patel were also […]
As discussed in the previous article, capital rationing is a form of capital budgeting. In capital rationing we change the unlimited capital assumption of capital budgeting and we try to choose projects with the finite capital that we have on hand. This finite capital may be in the form of capital that the firm already has or it may be in the form of a decision to raise a limited amount of capital in the future. Either way, the amount of capital available at the company’s disposal for decision making is finite and it is known. There are two types of capital rationing. They have been explained in this article:
Soft rationing is when the firm itself limits the amount of capital that is going to be used for investment decisions in a given time period. This could happen because of a variety of reasons:
This type of rationing is called soft because it is the firm’s internal decision. They can change or modify it in the future if they think that it is in their best interest to do so.
Also, companies usually implement this kind of rationing on a department basis. From a master investment budget, departmental investment budgets are drawn and each department is asked to choose projects on the basis of funds allocated. Only in case of an extremely attractive project are the departmental restrictions on capital investments compromised.
Hard rationing, on the other hand, is the limitation on capital that is forced by factors external to the firm. This could also be due to a variety of reasons:
So hard rationing arises because of market imperfections and because of limitations created by external parties.
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