In capital budgeting, capital rationing occurs when a company:
Correct answer: D. Faces a limit on funds for investment projects
- A. Has unlimited funds for all projects
- B. Uses only equity to finance projects
- C. Rejects every project with positive cash flow
- D. Faces a limit on funds for investment projects
Explanation
Capital rationing means that available investment funds are limited, so the company cannot accept every financially attractive project. It must select the combination that provides the best return within the funding constraint.
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About Business Finance
Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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