Capital Rationing

question 114

Multiple Choice

Capital rationing:

• A)is a technique for allocating scarce financial resources among viable projects.
• B)determines which projects pass the NPV and/or IRR tests.
• C)implies that all projects with positive NPVs should be undertaken.
• D)generally gives terrible results when done intuitively.

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Definitions:

Risk-Free Asset

An asset that supposedly carries no risk of financial loss and is expected to return its full value along with known interest or dividends.

Risky Asset

A financial instrument whose future returns are uncertain and subject to a wide variety of outcomes.

Capital Allocation Line

A graphical representation used in finance to show possible rates of return for portfolios with different levels of risk.

Lending Rate

The interest rate charged by banks on loans extended to clients.