capital rationing

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Capital rationing

Placing limits on the amount of new investment undertaken by a firm, either by using a higher cost of capital, or by setting a maximum on the entire capital budget or parts of it.

Capital Rationing

The act or practice of limiting a company's investment. That is, capital rationing occurs when a company's management places a maximum amount on new investments it can make over a given period of time. The two methods of capital rationing are forbidding investments over a certain amount or increasing the cost of capital for such investments. Capital rationing is most common when a company's previous investments have not performed well.

capital rationing

a situation where a firm selects an annual capital budget which is less than the amount required to undertake all INVESTMENTS promising a rate of return in excess of the cost of capital. For example, if a firm requires a minimum 20% return on any investment then all of the appropriate investment opportunities available to the firm which promise a return of 20% or more may involve a total expenditure of, say, £10 million. However, if the firm decides that it is willing to spend only £6 million, then it must rank investment opportunities in descending order of rate of return, undertaking those with the highest promised return and rejecting others even though the latter opportunities promise a re- turn greater than the 20% cost of capital. The firm is said to be in a situation of capital rationing because it is investing less than the amount dictated by usual profit maximizing criteria. See CAPITAL BUDGETING, INVESTMENT APPRAISAL.
References in periodicals archive ?
However, large bank holding companies (those with $50 billion or more in total assets) will be required to "take affirmative steps to improve capital rations, such as external capital raises, when those steps would be needed to meet each Basel III transition on time," Tarullo added.
The savings bank's core and tangible capital rations were 6.
At September 30, 1999, the capital rations for YNB -- both Tier 1 and Leverage ratios -- exceeded those required by regulatory guidelines to be considered well capitalized.

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