How might capital rationing conflict with the goal of maximizing shareholders' wealth?
What will be an ideal response?
The use of our capital-budgeting decision rules implies that the size of the capital budget is determined by the
availability of acceptable investment proposals. However, a firm may place a limit on the dollar size of the capital
budget, they are recognizing that they do not have the ability to profitably handle more than a certain number of new
and/or large projects. This situation is called capital rationing.
Capital rationing has a negative effect on the firm. To what degree it is negative depends on the severity of the
rationing. If the rationing is minor and short-lived, the firm's share price will not suffer to any great extent. In this case,
capital rationing can probably be excused, although it should be noted that any capital-rationing action that rejects
projects with positive NPVs is contrary to the firm's goal of maximization of shareholders' wealth. If the capital
rationing is a result of the firm's decision to limit dramatically the number of new projects or to use only internally
generated funds for projects, then this policy will eventually have a significantly negative effect on the firm's share
price. For example, a lower share price will eventually result from lost competitive advantage if, because of a decision
to arbitrarily limit its capital budget, a firm fails to upgrade its products and manufacturing processes.
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The par value of stock is ________.
A) the current selling price of stock B) the highest price for which a share can sell C) the price paid if the corporation purchases its own stock back D) the amount assigned by a company to a share of its stock
José has consistently exceeded his sales projections for the past four quarters. His supervisor gave him a promotion because of his high sales success. His supervisor is using ______.
A. transformational leadership B. middle-of-the-road leadership C. laissez-faire leadership D. transactional leadership
Which of the following objectives is unique to the questions approach technique?
A. It helps capture the attention of the prospect B. It provides a transition into the sales presentation C. It helps to create a selling environment D. It is used to stimulate the prospect's interest E. It can be used to uncover the prospect's needs
The price-earnings ratio is computed by dividing earnings per share by the par value per share.
Answer the following statement true (T) or false (F)