Financial managers have maximising shareholder wealth as their. Capital rationing is where there are insufficient funds to do so. This implies that where investment capital is rationed, shareholder wealth is not being maximised. The role of World War II Rationing in the history of the United States of America.
These primary source documents supplement teaching about shortages and rationing in WWII.Types of capital rationing Hard capital rationing An absolute limit on the amount of finance available is imposed by the lending institutions. Soft capital rationing A company may impose its own rationing on capital. This is contrary to the rational view of shareholder wealth maximisation. Reasons for capital rationing Single and multi- period capital rationing Capital rationing can apply to a single period, or to multiple periods. Single- period capital rationing occurs when there is a shortage of funds for one. Multi- period capital rationing is where there will be a. To determine the optimum use of capital investment, a trial and error approach must be used. Mutually- exclusive projects Sometimes the taking on of projects will preclude the taking on of another, e. This method can only deal with one limiting factor(i. Here there are a number of limiting factors (i. The objective of the solution can be either: to maximise the total NPV from the investment in available projects to maximise the present value of cash flow available for dividends. Both techniques result in the same project selections. Dual values The dual price is: the amount by which one additional unit of scarce resource would increase the value of the objective function, or alternatively the amount by which one fewer unit of scarce resource would decrease the value of the objective function. In capital rationing, the scarce resource is available funds, so the dual value expresses the increase in the objective function gained if one more dollar became available, or the reduction if one less dollar were invested. The amount of the dual value varies depending on which method is used to formulate the linear programme: NPV method. PV of dividends method.
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