ACCA Strategic Professional · Advanced Financial Management · Discounted cash flow techniques
Which of the following is an example of hard capital rationing?
A bank refusing further finance, with no equity alternative available, is hard capital rationing. Hard rationing is imposed by external capital markets or lenders. Divisional caps, departmental budgets and inflated hurdle rates are set internally by management, so they are soft rationing.
- AThe board sets each division a spending cap that is below the level it could afford, to enforce discipline
- BA bank refuses to lend a company more than a fixed sum, and the company cannot raise equity, even though further projects have positive NPVsCorrect
- CA manager delays a project because the department's annual budget is already used up
- DThe finance director sets a hurdle rate above the cost of capital to screen out marginal projects
Explanation
Hard rationing arises from external constraints, such as lenders or capital markets limiting the funds available. The other options describe limits or policies set internally by management, which is soft rationing.
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