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 Reserve

    A type of account on a municipality's or company's balance sheet ...
  6. Capital Budgeting

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

    Ratio Analysis Tutorial

  2. ROA And ROE Give Clear Picture Of Corporate ...
    Markets

    ROA And ROE Give Clear Picture Of Corporate ...

  3. Use ROA To Gauge A Company's Profits
    Budgeting

    Use ROA To Gauge A Company's Profits

  4. Are Your Children Destroying Your Retirement?
    Retirement

    Are Your Children Destroying Your Retirement?

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center