Soft capital rationing:
A)is costly to shareholders
B)Is used to determine mutually exclusive projects
C)Should be costless to the shareholders of the firm
D)Solves the problem of investment timing

Question

Quizplus · Accepted Answer

Soft capital rationing refers to a situation where external financing is limited due to internal constraints such as management's reluctance to raise debt or issue new equity. It is a flexible form of capital rationing and is imposed voluntarily by the management to safeguard the financial stability of the firm. As it is an internal constraint, it should not be costly to the shareholders. Hence, option C is the correct choice. Option A is incorrect because soft capital rationing does not involve any direct cost to the shareholders. Option B is not right because the selection of mutually exclusive projects is guided by the means of capital budgeting analysis and not by soft capital rationing. Option D is not true because investment timing requires careful analysis of external factors like market conditions, regulatory environment, and economic outlook, which are beyond the scope of capital rationing decision.

Soft Capital Rationing