What is a situation where a firm restricts its capital expenditures classified________?
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Answer: B. Capital rationing
Explanation
Capital rationing occurs when management enforces an artificial ceiling on total capital expenditures. This restriction prevents the firm from funding every single project with a positive net present value. Internal budget limits or external financing constraints are the primary drivers of this policy. Firms often face hard capital rationing due to limited availability of external debt or equity financing. Soft capital rationing is self-imposed by executive management to maintain financial control and discipline. When rationing capital, managers must prioritize projects using profitability indices rather than net present value.
Growing companies frequently encounter capital rationing during periods of rapid operational expansion. Financial managers use specialized ranking methods to select the best projects under constrained budgets. Ignoring capital rationing limits can lead to severe liquidity shortages and broken financing covenants. Optimal rationing is a contradiction in terms since rationing implies a sub-optimal constraint on value. Marginal rationing is not a standard economic or financial term used in capital budgeting theory. Transaction rationing refers to administrative limits on banking transactions rather than corporate investments.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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