Capital rationing

Question

Explain in brief capital rationing? What are reasons that a firm should practice capital rationing?

Answer 1

The Capital rationing is a practice of defining dollar limits on the basis of invested amount in the new capital budgeting projects. Private corporations, partnerships and proprietorships are in a position to do anything that owner desires. It can be discussed that for a publicly traded corporation capital rationing might not be reliable with maximizing the firm’s value. This is mainly due to some value adding projects might get rejected if they will make the firm to exceed self imposed capital rationing limit.