Capital Rationing

The act of placing restrictions on the amount of new investments or projects undertaken by a company. This is accomplished by imposing a higher cost of capital for investment consideration or by setting a ceiling on the specific sections of the budget.

Companies may want to implement capital rationing in situations where past returns of investment were lower than expected. For example, suppose ABC Corp. has a cost of capital of 10% but that the company has undertaken too many projects, many of which are incomplete. This causes the company's actual return on investment to drop well below the 10% level. As a result, management decides to place a cap on the number of new projects by raising the cost of capital for these new projects to 15%. Starting fewer new projects would give the company more time and resources to complete existing projects.


Investment dictionary. . 2012.

Look at other dictionaries:

  • Capital rationing — Placing one or more limits on the amount of new investment undertaken by a firm, either by using a higher cost of capital, or by setting a maximum on parts of, and/or the entirety of, the capital budget. The New York Times Financial Glossary * *… …   Financial and business terms

  • capital rationing — Placing limits on the amount of new investment undertaken by a firm, either by using a higher cost of capital, or by setting a maximum on the entire capital budget or parts of it. Bloomberg Financial Dictionary * * * capital rationing ˌcapital… …   Financial and business terms

  • capital rationing — The situation that arises when managers have insufficient money to invest in all projects with a positive net present value. The term soft capital rationing is used of situations in which a company sets its own limits on the amount of money… …   Accounting dictionary

  • capital rationing — The situation that arises when managers have insufficient money to invest in all projects with a positive net present value The term soft capital rationing is used of situations in which a company sets its own limits on the amount of money… …   Big dictionary of business and management

  • capital rationing — decisions concerning allocation of limited financial resources at the company s disposal …   English contemporary dictionary

  • capital rationing — Fin the restriction of new investment by a company …   The ultimate business dictionary

  • Hard capital rationing — Capital rationing that under no circumstances can be violated. The New York Times Financial Glossary …   Financial and business terms

  • Soft Capital Rationing — Capital rationing that under certain circumstances can be violated or even viewed as made up of targets rather than absolute constraints. The New York Times Financial Glossary …   Financial and business terms

  • hard capital rationing — A capital budget that under no circumstances can be violated. Bloomberg Financial Dictionary …   Financial and business terms

  • soft capital rationing — Constraints on spending that under certain circumstances can be violated or even viewed as constituting targets rather than absolute limits. Bloomberg Financial Dictionary …   Financial and business terms


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