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Capital rationing occurs when funds are not available to finance all wealth-enhancing projects. There are two types of capital rationing:
(a) Soft capital rationing – is internal management-imposed limits on investment expenditure. Such limits may be linked to the firm’s financial control policy.
(b) Hard capital rationing – relates to capital from external sources. Agencies (e.g. shareholders and bank) external to the firm will not supply unlimited amounts of investment capital, even though positive NPV projects are identified.
Hard capital rationing may arise for one of the following reasons.
(a) Raising money through the stock market may not be possible if share prices are depressed.
(b) There may be restrictions on bank lending due to government control.
(c) Lending institutions may consider an organization to be too risky to be granted further loan facilities.
(d) The costs associated with making small issues of capital may be too great
