Capital rationing may be beneficial to a firm if it:
A)reduces a firm's interest expense.
B)weeds out proposals with weaker or biased NPVs.
C)allows managers to select their favourite projects.
D)increases funds to be used for other purposes.

Question

Quizplus · Accepted Answer

Capital rationing forces a company to prioritize its projects by selecting only those that have the highest NPV, resulting in weeding out proposals with weaker or biased NPVs. This ensures that the company is investing in the most profitable projects, which should lead to increased profits and overall growth. A, C, and D are not necessarily true as reducing interest expense depends on the type of financing used, the selection of "favorite" projects may not be the most profitable, and increasing funds for other purposes could result in missed investment opportunities.

Capital Rationing May Be Beneficial to a Firm If It