Financial modelling terms explained

Capital Rationing

Capital rationing refers to the restriction of capital expenditure on projects that can bring greater returns to the limited resources of a corporation that can be used for other profitable ventures. Capital rationing can be used to decide which projects a company should undertake, and is linked to the concept of NPV.

What Is Capital Rationing, and How Does It Relate to Financial Modelling?

Capital rationing is the limiting of the amount of funds that are available for investments or lending. It occurs when there is not enough money to go around and companies must choose which projects to fund and which to abandon. This can be due to a variety of factors, such as a lack of investor interest or a shortage of credit.

In financial modelling, capital rationing can impact the valuation of a company or project. When there is a limit on the amount of funds available, the company or project may be worth less than if it had an unlimited supply of capital. This is because there is a higher risk that the company or project will not be able to get the money it needs to continue operations. As a result, investors may be less willing to invest in the company or project, which will lower its value.

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