Topic: Capital rationing

Search 500 + past questions and counting.

  • Filter by Professional Bodies

  • Filter by Subject

  • Filter by Series

  • Filter by Topics

  • Filter by Levels

  • 20 Marks

FM – DEC 2023 – L2 – Q4 – Capital rationing | Introduction to Investment Appraisal | Sources of finance: debt

Explanation of capital rationing concepts, NPV and profitability index calculations, and factors influencing debt finance decisions.

a) In periods of difficult global financial environment, raising of capital is a challenge necessitating the need for prudent and best use of scarce capital for projects.

Required:
i) Explain the term capital rationing. (2 marks)
ii) Distinguish between soft capital rationing and hard capital rationing giving an example each. (3 marks)

b) Akonta Ghana Ltd has excess funds of GH¢200 million and is looking for attractive investment opportunities that will yield a return of 15% per annum or better to deploy the funds. An extract from a Feasibility report submitted by a team of investment and project experts is as follows:

Project Initial Investment Required (GH¢) Constant Annual Cash Inflow (GH¢) Project Life (Years)
A 80,000,000 36,000,000 4
B 40,000,000 23,000,000 3
C 78,000,000 30,000,000 5
D 40,000,000 20,000,000 4
E 40,000,000 22,000,000 3

The cash flows per project are constant for the life span of each project and each project is divisible for the purpose of capital allocation.

Required:
i) Calculate the Net Present Values (NPVs) of each project. (7 marks)
ii) Rank the projects using Profitability Index and allocate the GH¢200 million among the projects. (3 marks)

c) There are many sources of debt finance available to a company which has viable and profitable investment opportunities to utilise the funds. It is, however, very important for the Finance Manager to do a thorough work before deciding the type and source of debt finance to tap into.

Required:
Explain THREE (3) factors a Finance Manager should consider when deciding the type of debt finance to raise. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
  • 5 Marks

FM – Nov 2020 – L2 – Q4b – Capital rationing

Distinguish between soft and hard capital rationing and provide practical ways to deal with capital rationing.

In the coming years, the company is likely to face restrictions on financing for capital investments.

Required:

i) Distinguish between soft capital rationing and hard capital rationing. (2 marks)
ii) Advise the managers of the company on THREE (3) practical ways of dealing with capital rationing. (3 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
  • 20 Marks

FM – MAY 2016 – L2 – Q1 – Capital rationing | Discounted cash flow

Appraise project PA205 using NPV criteria, sensitivity analysis, and capital rationing advice. Discuss ways to address capital constraints.

ABC Ltd is considering five projects for the coming financial year. Four of the projects have undergone financial appraisal (see the table below).

Project Lifespan Initial investment (GH¢) NPV (GH¢) IRR
PA201 Indefinite (50,000) 85,200 11.5%
PA202 Indefinite (75,000) 98,500 12.3%
PA203 Indefinite (48,000) 65,950 10.2%
PA204 Indefinite (85,000) 95,400 11.4%
PA205 Indefinite (150,000) Yet to be appraised Yet to be appraised

Project PA205 entails an immediate capital investment of GH¢150,000 and will produce the following annual net cash flows in real terms:

Year 1 2 3 4 5 Every year after year 5
Cash flow (GH¢) 5,000 10,500 25,000 28,000 30,000 30,000

Expected general rate of inflation is 15% and the company’s money required rate of return is 25%.

Required:

a) Appraise Project PA205 using the NPV criteria. (4 marks)
b) Assess the sensitivity of Project PA205 to the discount rate. (4 marks)

c) Suppose in the coming financial year, only GH¢200,000 of finance will be available for investments but the capital constraint will ease afterwards. Advise the company on which project(s) to implement in the coming year if the projects are –

i) Independent and divisible (3 marks)
ii) Independent and indivisible (3 marks)

d) When management rejects projects with positive net present value because of capital constraints, they lose opportunities to enhance the value of shareholders. Suggest three practical ways of dealing with capital rationing so as not to discard projects with positive net present value. (6 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
  • 20 Marks

FM – Nov 2019 – L2 – Q4 – Capital rationing | Discounted cash flow

Compute NPV and IRR, assess sensitivity, and recommend a project portfolio under capital rationing.

The current financial year of General Kapito Ltd, a sports apparel company based in Ghana, will be ending in two months’ time. The directors of the company will be meeting next week to approve capital projects that will be implemented in the coming financial year. A major concern for the coming year is the availability of finance to meet investment requirements.

The cost of raising new capital in Ghana’s capital market has risen so high that it is not cost-effective to raise small blocks of capital. Consequently, the directors of the company have decided to finance new projects in the coming year with retained earnings and not raise new external capital from the capital market to bridge any financing gap. The maximum amount of retained earnings that will be available for financing new capital projects in the coming year is GH¢62 million.

There are six independent projects that will be presented before the board of directors for approval in their upcoming meeting. Five of the projects have been appraised already (see a summary of the projects in the table below).

Project Investment requirement Net present value (NPV) Internal rate of return (IRR)
PROJECT-01 25 50 36.2%
PROJECT-02 15 45 37.1%
PROJECT-03 9 35 39.5%
PROJECT-04 12 20 34.8%
PROJECT-05 34 To be computed To be computed
PROJECT-06 5 2 33.5%

Project-05 refers to a 5-year contract with a local football club for the manufacture and supply of a special football boot for playing under rainy conditions. It is estimated that this project will require an investment of GH¢34 million in plant and equipment at the start of the first year. The estimated cost of required plant and equipment might change as there are speculations about probable change in technology in the coming year. That notwithstanding, this project is expected to return an after-tax net operating cash flow of GH¢13.5 million every year over the coming five years. The estimated after-tax salvage value of the plant and equipment is GH¢10 million at the end of the fifth year.

The company’s required rate of return is 25%.

Required:

a) Compute the NPV and IRR of Project-05. (10 marks)

b) Assess the sensitivity of the outcome of Project-05 to variations in the cost of plant and equipment. Interpret your result. (5 marks)

c) Assuming the projects are divisible, recommend the portfolio of projects that should be funded in the coming year. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
  • 15 Marks

FM – Nov 2017 – L2 – Q3b – Capital rationing

Determine which projects should be selected based on the capital budget and profitability index under given constraints.

The Gomoa Chemical Limited has a capital budget for 2018 of GH¢1,000,000. The following capital investment proposals are submitted to the capital budget committee:

PROJECT PROFITABILITY INDEX OUTLAY
1 1.2 200,000
2 1.18 200,000
3 1.17 100,000
4 1.10 300,000
5 1.15 200,000
6 1.13 200,000
7 1.19 400,000
8 1.21 100,000
9 1.22 100,000
10 1.16 100,000

The company’s cost of capital is 5%. Projects 2 and 8 are mutually exclusive: Projects 1 and 5 are mutually dependent.

Required:
As the chairman of the budget committee, which projects should the committee choose? (15 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
  • 20 Marks

FM – DEC 2023 – L2 – Q4 – Capital rationing | Introduction to Investment Appraisal | Sources of finance: debt

Explanation of capital rationing concepts, NPV and profitability index calculations, and factors influencing debt finance decisions.

a) In periods of difficult global financial environment, raising of capital is a challenge necessitating the need for prudent and best use of scarce capital for projects.

Required:
i) Explain the term capital rationing. (2 marks)
ii) Distinguish between soft capital rationing and hard capital rationing giving an example each. (3 marks)

b) Akonta Ghana Ltd has excess funds of GH¢200 million and is looking for attractive investment opportunities that will yield a return of 15% per annum or better to deploy the funds. An extract from a Feasibility report submitted by a team of investment and project experts is as follows:

Project Initial Investment Required (GH¢) Constant Annual Cash Inflow (GH¢) Project Life (Years)
A 80,000,000 36,000,000 4
B 40,000,000 23,000,000 3
C 78,000,000 30,000,000 5
D 40,000,000 20,000,000 4
E 40,000,000 22,000,000 3

The cash flows per project are constant for the life span of each project and each project is divisible for the purpose of capital allocation.

Required:
i) Calculate the Net Present Values (NPVs) of each project. (7 marks)
ii) Rank the projects using Profitability Index and allocate the GH¢200 million among the projects. (3 marks)

c) There are many sources of debt finance available to a company which has viable and profitable investment opportunities to utilise the funds. It is, however, very important for the Finance Manager to do a thorough work before deciding the type and source of debt finance to tap into.

Required:
Explain THREE (3) factors a Finance Manager should consider when deciding the type of debt finance to raise. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
  • 5 Marks

FM – Nov 2020 – L2 – Q4b – Capital rationing

Distinguish between soft and hard capital rationing and provide practical ways to deal with capital rationing.

In the coming years, the company is likely to face restrictions on financing for capital investments.

Required:

i) Distinguish between soft capital rationing and hard capital rationing. (2 marks)
ii) Advise the managers of the company on THREE (3) practical ways of dealing with capital rationing. (3 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
  • 20 Marks

FM – MAY 2016 – L2 – Q1 – Capital rationing | Discounted cash flow

Appraise project PA205 using NPV criteria, sensitivity analysis, and capital rationing advice. Discuss ways to address capital constraints.

ABC Ltd is considering five projects for the coming financial year. Four of the projects have undergone financial appraisal (see the table below).

Project Lifespan Initial investment (GH¢) NPV (GH¢) IRR
PA201 Indefinite (50,000) 85,200 11.5%
PA202 Indefinite (75,000) 98,500 12.3%
PA203 Indefinite (48,000) 65,950 10.2%
PA204 Indefinite (85,000) 95,400 11.4%
PA205 Indefinite (150,000) Yet to be appraised Yet to be appraised

Project PA205 entails an immediate capital investment of GH¢150,000 and will produce the following annual net cash flows in real terms:

Year 1 2 3 4 5 Every year after year 5
Cash flow (GH¢) 5,000 10,500 25,000 28,000 30,000 30,000

Expected general rate of inflation is 15% and the company’s money required rate of return is 25%.

Required:

a) Appraise Project PA205 using the NPV criteria. (4 marks)
b) Assess the sensitivity of Project PA205 to the discount rate. (4 marks)

c) Suppose in the coming financial year, only GH¢200,000 of finance will be available for investments but the capital constraint will ease afterwards. Advise the company on which project(s) to implement in the coming year if the projects are –

i) Independent and divisible (3 marks)
ii) Independent and indivisible (3 marks)

d) When management rejects projects with positive net present value because of capital constraints, they lose opportunities to enhance the value of shareholders. Suggest three practical ways of dealing with capital rationing so as not to discard projects with positive net present value. (6 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
  • 20 Marks

FM – Nov 2019 – L2 – Q4 – Capital rationing | Discounted cash flow

Compute NPV and IRR, assess sensitivity, and recommend a project portfolio under capital rationing.

The current financial year of General Kapito Ltd, a sports apparel company based in Ghana, will be ending in two months’ time. The directors of the company will be meeting next week to approve capital projects that will be implemented in the coming financial year. A major concern for the coming year is the availability of finance to meet investment requirements.

The cost of raising new capital in Ghana’s capital market has risen so high that it is not cost-effective to raise small blocks of capital. Consequently, the directors of the company have decided to finance new projects in the coming year with retained earnings and not raise new external capital from the capital market to bridge any financing gap. The maximum amount of retained earnings that will be available for financing new capital projects in the coming year is GH¢62 million.

There are six independent projects that will be presented before the board of directors for approval in their upcoming meeting. Five of the projects have been appraised already (see a summary of the projects in the table below).

Project Investment requirement Net present value (NPV) Internal rate of return (IRR)
PROJECT-01 25 50 36.2%
PROJECT-02 15 45 37.1%
PROJECT-03 9 35 39.5%
PROJECT-04 12 20 34.8%
PROJECT-05 34 To be computed To be computed
PROJECT-06 5 2 33.5%

Project-05 refers to a 5-year contract with a local football club for the manufacture and supply of a special football boot for playing under rainy conditions. It is estimated that this project will require an investment of GH¢34 million in plant and equipment at the start of the first year. The estimated cost of required plant and equipment might change as there are speculations about probable change in technology in the coming year. That notwithstanding, this project is expected to return an after-tax net operating cash flow of GH¢13.5 million every year over the coming five years. The estimated after-tax salvage value of the plant and equipment is GH¢10 million at the end of the fifth year.

The company’s required rate of return is 25%.

Required:

a) Compute the NPV and IRR of Project-05. (10 marks)

b) Assess the sensitivity of the outcome of Project-05 to variations in the cost of plant and equipment. Interpret your result. (5 marks)

c) Assuming the projects are divisible, recommend the portfolio of projects that should be funded in the coming year. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
  • 15 Marks

FM – Nov 2017 – L2 – Q3b – Capital rationing

Determine which projects should be selected based on the capital budget and profitability index under given constraints.

The Gomoa Chemical Limited has a capital budget for 2018 of GH¢1,000,000. The following capital investment proposals are submitted to the capital budget committee:

PROJECT PROFITABILITY INDEX OUTLAY
1 1.2 200,000
2 1.18 200,000
3 1.17 100,000
4 1.10 300,000
5 1.15 200,000
6 1.13 200,000
7 1.19 400,000
8 1.21 100,000
9 1.22 100,000
10 1.16 100,000

The company’s cost of capital is 5%. Projects 2 and 8 are mutually exclusive: Projects 1 and 5 are mutually dependent.

Required:
As the chairman of the budget committee, which projects should the committee choose? (15 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error

Elevate your professional expertise across key business domains with our comprehensive training programs

Our offerings

Contact Info

  • +233203701923
    +233543919232
  • info@nbcinstitute.com

Customer

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope