When ﬁrms do not have suﬃcient available ﬁnancing to invest in the positive NPV projects they have identiﬁed, __________________ is/are said to exist.
A) Excess ﬁnancing.
B) Contingency options.
C) Strategic options.
D) Managerial options.
E) Capital rationing.

Question

Quizplus · Accepted Answer

When firms have positive NPV projects but cannot invest in them due to insufficient financing, it is referred to as capital rationing. This occurs when the firm's financial resources are limited, either due to internal (e.g. cash flow) or external (e.g. tight credit markets) factors. As a result, the firm must prioritize its investment decisions and allocate its limited resources towards the projects with the highest returns.

When ﬁRms Do Not Have Suﬃcient Available ﬁNancing to Invest