The correct answer is: A. maximum capital budget
A maximum capital budget is the upper limit on the amount of money that a company can spend on capital projects in a given year. When a company reaches its maximum capital budget, it can no longer invest in new projects, even if those projects would have a positive return on investment. This can lead to a number of problems, including:
- An increase in the marginal cost of capital. When a company has a limited amount of money to invest, it will have to pay a higher price for capital, such as debt or equity. This is because investors will demand a higher return on their investment when there is a limited supply of capital.
- Capital rationing. Capital rationing occurs when a company has more investment opportunities than it can afford to fund. This can lead to the company rejecting good investment opportunities, which can hurt its long-term growth.
A greater capital budget would not necessarily lead to these problems, as the company would have more money to invest in projects. An optimal capital budget is the amount of money that a company should spend on capital projects in order to maximize its profits. A minimum capital budget is the amount of money that a company must spend on capital projects in order to maintain its operations.
In conclusion, a maximum capital budget can lead to an increase in the marginal cost of capital and capital rationing. These problems can hurt a company’s long-term growth.