#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Unlimited funds versus capital rationing. Capital rationing occurs when management places a constraint on the size of the firm's capital budget during a particular period. In such situations, capital is scarce and should be allocated to the projects most likely to maximize the firm's aggregate NPV. The firm's capital budget and cost of capital must be determined simultaneously to best allocate the firm's capital. On the other hand, a firm can raise the funds it wants for all profitable projects simply by paying the required rate of return.