Capital rationing is tested in both of my exams – ACCA FM & AFM. It is simply defined as not having sufficient resources to invest in all projects that have a positive NPV.

There are two defined categories – hard & soft.

Hard CR is caused by external factors. The company cannot raise the cash due to factors that to a large extent are not in their control. For instance, they maybe an SME. They may not be listed and no access to the capital markets. Or even a service based company with limited access to debt capital.

Soft CR This type of rationing is due to internal constraints.

A fiscally conservative company, for example, may have a high required return on capital to accept a project, self-imposing its own capital rationing.

It is possible to say the “soft” is caused by “hard” which is a logical conclusion. The board may pass down the issues they are suffering to their divisional managers.

In both ACCA FM & AFM, single period CR is the priority. Then you need to consider if the projects are divisible or not. The former will require you to base your decision on maximising the NPV/$ invested at the point of investment.