What is hard capital rationing typically associated with?

What is hard capital rationing typically associated with?

• A. A limited availability of internal funding sources
• B. A restriction caused by external economic circumstances
• C. Excess funds within an organization
• D. Free market investment opportunities

Answer: (B)

Hard capital rationing is typically associated with a restriction caused by external economic circumstances. This means that companies face limitations on their ability to raise capital due to market conditions, such as high interest rates or investor uncertainty. As a result, firms may not be able to secure the necessary funds to finance desired investment projects, even if those projects are potentially profitable. In contrast, soft capital rationing refers to internal constraints, such as company policies or managers’ decisions that limit capital expenditures. This distinction is essential in understanding the impact of external versus internal factors on a firm’s financing decisions. The other options do not accurately reflect the essence of hard capital rationing. A limited availability of internal funding sources refers to soft rationing, while excess funds within an organization and free market investment opportunities do not describe the constraints imposed by external economic conditions that characterize hard capital rationing.

Hard capital rationing is typically associated with a restriction caused by external economic circumstances. This means that companies face limitations on their ability to raise capital due to market conditions, such as high interest rates or investor uncertainty. As a result, firms may not be able to secure the necessary funds to finance desired investment projects, even if those projects are potentially profitable.

In contrast, soft capital rationing refers to internal constraints, such as company policies or managers’ decisions that limit capital expenditures. This distinction is essential in understanding the impact of external versus internal factors on a firm’s financing decisions.

The other options do not accurately reflect the essence of hard capital rationing. A limited availability of internal funding sources refers to soft rationing, while excess funds within an organization and free market investment opportunities do not describe the constraints imposed by external economic conditions that characterize hard capital rationing.