The correct answer is: B. That limited funds are available for investment.
Capital rationing is a financial planning technique that limits the amount of money that a company can spend on capital projects. This can be done for a variety of reasons, such as to maintain a certain level of debt, to conserve cash, or to focus on a specific set of projects.
When a company engages in capital rationing, it must decide which projects to fund and which to reject. This can be a difficult decision, as it requires the company to weigh the potential benefits of each project against the cost of funding it.
There are a number of different methods that companies can use to ration capital. One common method is to rank projects based on their expected return on investment (ROI). The projects with the highest ROI are then funded first, until the available funds are exhausted.
Another common method is to use a scoring system to rank projects. This system takes into account a variety of factors, such as the project’s ROI, its risk level, and its fit with the company’s overall strategy.
The goal of capital rationing is to ensure that the company’s capital resources are used in the most efficient way possible. By carefully selecting which projects to fund, companies can maximize their returns on investment and minimize their risk.
Here is a brief explanation of each option:
- Option A: That no retained earnings available. This is not the correct answer because retained earnings are only one source of funds that can be used for capital investment. Other sources of funds include debt financing and external equity financing.
- Option B: That limited funds are available for investment. This is the correct answer because capital rationing is a technique that limits the amount of money that a company can spend on capital projects.
- Option C: That no external funds can be raised. This is not the correct answer because capital rationing does not necessarily mean that no external funds can be raised. Companies can still raise external funds, but they will have to do so within the limits of the capital rationing plan.
- Option D: That no fresh investment is required in current year. This is not the correct answer because capital rationing can be used to ration funds for both new and existing projects.