1. SWARNAM S CAPITAL RATIONING

2. INTRODUCTION Capital rationing situations arises when a firm operates within a fixed budget It other words, it means the selection of only some of the profitable investment proposals and the rejection of others profitable investment proposals due to limited availability of funds

3. TYPES OF CAPITAL RATIONING Hard Capital Rationing - A capital budget to which a company must adhere Soft Capital Rationing - limits based on the judgments of senior management

4. REASONS FOR CAPITAL RATIONING External Reasons : Imperfection of capital market information is not quickly disclosed to all participants in it and where the matching of buyers and sellers isn't immediate Internal Reasons : Company constraints

5. Steps in Capital Rationing Ranking of the different investment proposals Selection of some of the profitable investment proposals -- divisible project (project which can be accepted in parts) -- indivisible project (project which can be accepted or rejected entirely)

6. INFLATION AND CAPITAL BUDGETING Fall in the value of money For Example: A person would like to buy 1 kg of apple with Rs.100. Now when the inflation rate is 5% then the person would require Rs.105 to buy the same quantity of apples Inflation is of expected inflation and unexpected inflation Expected inflation is where the manager anticipates Unexpected inflation refers to the difference between actual and expected inflation

7. Inflation and Cash Flows Estimating the cash flows is the first step for selecting the proposals Determine cost and benefits Effects on Inflation on Cash Flows Discounting Cash Flow is generally expressed in nominal terms It would be inappropriate to use nominal rate which are not adjusted for impact of inflation Real Rate of Return should be determined

8. Inflation and Discount Rate The Discount rate has become one of the central concepts of finance It is greatly influenced in calculating NPV Effects of Inflation on Discount Rate: To be consistent and free from bias, the cash flow should match with the discount rate.

9. Implications The output price should be higher than the expected rate of return If the company is not able to raise the output price, it can make some internal adjustments in working capital The adjustments should be made through capital structure