Capital Rationing

AAA

DEFINITION of '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.

INVESTOPEDIA EXPLAINS 'Capital Rationing'

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.

RELATED TERMS
  1. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  2. Capital

    1) Financial assets or the financial value of assets, such as ...
  3. Zero-One Integer Programming

    An analytical method consisting of what amounts to a series of ...
  4. Capital Flows

    The movement of money for the purpose of investment, trade or ...
  5. Capital Expenditure - CAPEX

    Funds used by a company to acquire or upgrade physical assets ...
  6. Capital Budgeting

    The process in which a business determines whether projects such ...
Related Articles
  1. Fundamental Analysis

    Ratio Analysis Tutorial

    If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios.
  2. Markets

    ROA And ROE Give Clear Picture Of Corporate Health

    Both measure performance, but sometimes they tell a very different story. This is why they’re best used together.
  3. Budgeting

    Use ROA To Gauge A Company's Profits

    Do you rely too heavily on ROE? Consider using return on assets for a more complete picture.
  4. Taxes

    What is the best method of calculating depreciation for tax reporting purposes?

    Learn the best method for calculating depreciation for tax reporting purposes according to generally accepted accounting principles, or GAAP.
  5. Fundamental Analysis

    Are accounts receivable used when calculating a company's debt collateral?

    Learn how accounts receivables are recorded as assets on a balance sheet; they are used when calculating a company's total debt collateral.
  6. Fundamental Analysis

    Work In Progress (WIP)

    Work in progress, also know as WIP, is an asset on the company balance sheet. WIP is the accumulated costs of unfinished goods that are currently in the manufacturing process.
  7. Fundamental Analysis

    Capital Budgeting

    Capital budgeting is a planning process used by companies to evaluate which large projects to invest in, and how to finance them. It is sometimes called “investment appraisal.”
  8. Fundamental Analysis

    What is the difference between cost of equity and cost of capital?

    Read about some of the differences between a company's cost of equity and its cost of capital, two measures of its required returns on raised capital.
  9. Fundamental Analysis

    Is depreciation only used for tangible assets?

    Learn if tangible assets can be depreciated, as well as what other assets are eligible for depreciation so you can account for them accurately.
  10. Fundamental Analysis

    What does a high weighted average cost of capital (WACC) signify?

    Find out what it means for a company to have a relatively high weighted average cost of capital, or WACC, and why this is important to lenders and investors.

You May Also Like

Hot Definitions
  1. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  2. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  3. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  4. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  5. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  6. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
Trading Center