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Chapter 5
Capital rationing
3.1 Introduction
Shareholder wealth is maximised if a company undertakes all positive NPV projects it
has available. Capital rationing is where there are insufficient funds to do this. It
comes in two forms.
Hard capital rationing – an absolute limit on financing available is
imposed by the funders of the business. The business cannot raise
further cash
Soft capital rationing – an internally imposed limit on investment capital.
This is contrary to the rational view of shareholder wealth maximisation.
3.2 Single and multi-period capital rationing
Multi-period rationing is where funds are rationed in more than one period, but is
outside of the syllabus.
Single period rationing is where funds are limited in one period only
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