Question

Discuss the reasons why hard and soft capital rationing occur.

Answer 1

Capital Rationing:

The capital Rationing is the strategy of picking up the most profitable project to invest the available funds.

There are two types.

1. Hard capital rationing
2. Soft capital Rationing

Reasons for occuring hard and soft capital rationing:

• Hard capital rationing:

1. ?Start up Firms
2. Poor management and Track record
3. Lender's restrictions
4. Industry specific factors

• Soft Capital Rationing:

1. ?Promoter's decisions
2. An increase in opportunity cost of capital
3. Future scenarios.