finance lec 4 - CAPITAL RATIONING

Question 1

CAPITAL RATIONING ALL ABOUR

Answer 1

got limited resoures so pick investment descision wisely

Question 2

hard capital rationig

Answer 2

restrictions imposed externally

e.g depressed share capital prices mean you not attrracive

if existing capital not enough and hoping to make money through share issue you are very limtied

Question 3

what are the reasons for a companies ltd financial resources

Answer 3

hard capital rationing
soft capital rationing

Question 4

soft capital rationing

Answer 4

restrictions imposed internallt ny managment

Question 5

give example of why soft cpaitl rationing is a thing

Answer 5

may be concerns over total finace

when you borrow pay interest - big financial burden - dont pay back you may go into bankruptcy

managers dont want that pressure cuz the more you borrow the more you greater the interest and the burden

Question 6

why may mangrs not want yuo to issue shares either

Answer 6

when issue shares Sh base grows so now got lots mroe people claiming ownership of firm impacting control

and SH may not like management

Question 7

how do we calcualte earnings per share

Answer 7

profit of firm / # of shares

Question 8

in terms of earning per shahre why may firm not want to issue mroe shares

Answer 8

if number of shares increases this reduces the value of the earnings per share

Question 9

in shrt we dont want to raisse moeny through debt becasue

Answer 9

dont want an additional interest commitment

Question 10

in most companys there is what budget

Answer 10

capital expenditure

Question 11

what is the capital expenditure budget

Answer 11

specific amount of moeny managment set aside for I purposes

Question 12

sum up hard capital rationiogn

Answer 12

external - comp unable to raise any mroe moeny

Question 13

sum up soft capital rationig

Answer 13

imposed internally by management

due to concerns over total finance

interanl cmopetitive mkt for funds

Question 14

in soft capital rationing how do is exendityure allocated

Answer 14

based on priorities

Question 15

in soft cpaital rationing expenditure is allcoated based on priiorities what do priorities depend on

Answer 15

stage the business is at

Question 16

soft capital rationig if business is at a stage of being a startup and trying to expand as much as possible what will be our top priotity i.e wher e will most finance go

Answer 16

investment division

Question 17

in terms of soft capital rationig as the business becomes more mature , established and there is not that many investment opportunities avaialble what may company focus on therefore where may put moer of capital expenditure

Answer 17

marketing and PR department

Question 18

when we refer to capital rationig we refer to

Answer 18

period rationing

Question 19

what does period rationig mean

Answer 19

capital is only lmited at t0 = present when making a decision about a particular investment opportunity

Question 20

why dont we need to eb concerned about future limitations on capital

Answer 20

it’s freely available at any point in the future

Question 21

the time we are making the investmetn descision is the onyl time that

Answer 21

we have limited capital

Question 22

we need to identify teh cominatino of projects that will maximise the

Answer 22

NPV

We want the highest

Question 23

what is the profitabilty index calculation

Answer 23

measure of profitabilty

NPV
______

Initial Investment

Question 24

the higher the profitability index the

Answer 24

better the project in terms of using the limited capital

Question 25

what does hte profitability index show us

Answer 25

a CBA for a project

the proportion of benefit to cost gives us a CBA and tells us for every £ we invest what benefit we get

Question 26

when/ what projects do we use the profitability index for

Answer 26

divisibile

non defferable

non repeatable

Question 27

when we use the profitability index what do to work otu where to allocate capital

i.e. what are the steps

Answer 27

calculate profitability index

rank all projects based on the profitability index

allocate funds to projects in order of ranking and invest till all the funds have been used

Question 28

what does divisible mean

Answer 28

any portion of project can be undertaken

i,.e can invest only half or full amount

can invest in part of project even if dont have enough capital

Question 29

what does non defferable mean

Answer 29

if project not undertaken at present it cannot be undertaken later

now or never

Question 30

non repeatable meaning

Answer 30

undertaken only once - wont have this opportunity to do it again in tht efuture

Question 31

most project are non deferrable and non repeatable so what should we focus on

Answer 31

whether it is divisiblei

Question 32

if project is indivisible and we can’t afford it what do we need to do

Answer 32

move onto next project

Question 33

if project is indivisible / in genral when deciding waht to invest in what do we need to consider

Answer 33

all possible combinations of projects I can afford with 1 milly

Question 34

the combination we pick of projects we invest in need to give ht ehighest overall

Answer 34

NPV

Question 35

What are the steps to rank the numbers

Answer 35

take profitability index of projects in each combination . wright thm by the amount hey cost relative to teh total budget

choose the one w the highest weighted avg profit index

Question 36

if project iis divisible what do we do/ if project is non divisible

Answer 36

divisible - look at PI and rank then allocate finds till run out

non divisible - find combo you can afford w 800,000 then choose highest NPV , calc weighted avg PI for each and pick highest

Question 37

we we can invest 100% of capital into project what do we get

Answer 37

100% of the return

Question 38

if the project costs 400k and can only invest 262 k what % of the NPV do we get

Answer 38

262/400 x 100

= 65.5%

Question 39

if non divisible waht do we do

Answer 39

ID all possible combos we can afford with our cash

work out which combined give highest NPV
rule - choose project with the highest NPV/hihghest weifhted avg PI

Question 40

If there is a single project with high NPV does this mean you invest in that automatically

Answer 40

no as a combo could give a higher result

Question 41

used capital is an ….. investment

Answer 41

idle

Question 42

used capital is an idle investment so what NPV and PI does it give

Answer 42

0

Question 43

to sum up divisible and non divisible

Answer 43

divisible - rank based on PI , then allocate money to I till run out

indivisible - id all possible afforable combos , the choose one with the highest NPV/- dont acc think you need avg pi for this last part

Question 44

how do we work out weighted pi

Answer 44

capital investment required(cost of project) /
investment budget available

*

PI

Question 45

when project not divisible what do you do

Answer 45

consider combo pick one with the highest weighted avg profitability index