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ACCA Strategic Professional · Advanced Financial Management · Discounted cash flow techniques

Which statement about hard and soft capital rationing is correct?

Soft capital rationing comes from internal management policy, such as budget caps or reluctance to raise equity, so it can be relaxed if value-creating projects are being rejected. Hard rationing is imposed externally by capital markets or lenders and cannot be changed by management.

  1. ASoft rationing is imposed by external capital markets, so management cannot change it
  2. BHard rationing arises from internal management limits on the capital budget
  3. CSoft rationing arises from internal management policy, so it may be relaxed if worthwhile projects are rejectedCorrect
  4. DHard rationing means the company can always raise more funds at a higher cost of capital

Explanation

Soft rationing is internally imposed, for example divisional budget limits or a reluctance to issue equity, so management can in principle relax it. Hard rationing is externally imposed, such as lenders refusing further funds or market conditions. The other options reverse these definitions.

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