Question

what might cause a firm to face capital constraints? Provide an example

Answer 1

A company may face constraints of capital because it can be difficult for financiers to accurately assess and measure the risks and returns associated with the projects.This might cause the investors to demand higher minimum expected required returns for their capital. The high rate of minimum required rate of return make positive cash flow project unattractive, because those projects cannot produce the high returns required by investors.

For example if a project internal rate of return is 12% while financiers minimum required rate of return is 15% so in this case project will get difficulty to get the finance as it is not fulfilling the requirement of the financier minimum required rate of return.