ACCA Financial Management (F9) Certification Practice Exam

What is capital rationing?

1. A restriction on the amount of capital that can be allocated to investments

2. The process of acquiring loans for investment projects

3. A method for maximizing returns on existing investments

4. An accounting term for valuing project assets

The correct answer is: A restriction on the amount of capital that can be allocated to investments

Capital rationing refers to a situation where an organization imposes limitations on the amount of capital that can be spent on investment projects, even when profitable opportunities exist. This restriction can stem from internal company policies, financial constraints, or market conditions. The goal is to efficiently allocate limited resources among competing projects, ensuring that the capital is directed towards the most promising investments that align with the company's overall strategy and provide the highest potential returns. The reason this answer is correct lies in its focus on the allocation of capital within set limits and the strategic decision-making involved. When firms face capital rationing, they often must prioritize certain projects based on factors like expected returns, risk, and alignment with long-term goals, which can lead to more disciplined financial management and optimization of resources. The other options do not accurately describe capital rationing. Acquiring loans for investment projects pertains to financing, not the limitation of capital allocation itself. Maximizing returns on existing investments relates to performance improvement rather than the restriction of project funding. Valuing project assets is an accounting practice that does not inherently involve capital rationing or its strategic implications. Therefore, the essence of capital rationing is best captured by the notion of restrictions on the amount of capital allocated for investments.