In the coming years, the company is likely to face restrictions on financing for capital investments.
Required:
i) Distinguish between soft capital rationing and hard capital rationing. (2 marks)
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Soft capital rationing is when the restriction on capital allocation to capital projects is due to internally imposed constraints such as managerial decisions.
Hard capital rationing is when the restriction on capital allocation to capital projects is due to the difficulty in raising capital from the capital market.
ii) Advice the managers of the company on THREE (3) practical ways of dealing with capital rationing. (3 marks)
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Practical ways of dealing with capital rationing include the following:
- Delay the start of projects that could not be financed immediately
- Seek joint venture with other firms to reduce the capital requirements on the firm
- Subcontract portions of the investment phase with the agreement that subcontractors pre-finance