Question

PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing:_______.
A) capital allocation.
B) hard rationing.
C) financial allocation.
D) financial deferral.
E) marginal rationing.

Answer 1

Answer:

B. Hard rationing.

Explanation:

This is seen in many cases when a company has failed in raising funds in the external equity market. Making the company to be placed on several restrictions that are beyond its control. These restrictions are seen to be faced by existing investors such as banks and other larger sized firms who place an upper limit on the amount of debt that can be issued before they make a loan. They are put in place to ensure that the company does not borrow excessively increasing risk and jeopardizing the investments of old lenders. Lastly, it arises because of market imperfections and because of limitations created by external parties.