Capital Rationing Research Articles

On Costs of Capital in Programming Approaches to Capital Budgeting

This paper is concerned with costs of capital in mathematical programming formulations of the problem of capital budgeting under capital rationing. It shows that there is a serious error in the method outlined by previous authors for converting the shadow prices from the solution of the dual into measures of the firm's marginal internal opportunity rates. In addition to demonstrating that the traditional approach leads to erroneous and nonsensical results, this paper presents a correct procedure for determining these rates.

The Effectiveness of Using Uncertainty Resolution to Measure Investment Flexibility in Sequential Capital Rationing

Abstract The manner in which the uncertainty associated with a prospective investment is resolved over the investment's life is an important consideration in judging the desirability of that investment. This paper presents a method for incorporating the idea of uncertainty resolution regarding an investment's flexibility with the traditional measures of investment worth, profitability and variability. The resulting investment criterion is a single index that is referred to as the Project Balance Criterion. To test the effectiveness of this new criterion for probabilistic cash flows, the Project Balance Criterion is compared to the traditional Mean-Variance criterion for a sequential decision process. This comparison is made for a number of different investment settings. In addition, the improvement in project selection that is possible when future cash flows are certain is contrasted with the results of applying the Project Balance Criterion to probabilistic cash flows.

Capital Expenditure Decision/Making: Some Tools and Trends

During the past two decades, several independent surveys were conducted to determine the art and science of capital budgeting, as practiced in business and industry. This paper outlines a synthesis of the various surveys and highlights some changes and trends regarding the adoption of quantitative tools in the capital budgeting process. The topics to be discussed include the use of discounting methods, the determination of discount and cut-off rates, the use of mathematical programming and capital rationing, and approaches to risk and uncertainty in the capital budgeting process. Before beginning, three possible sources of bias in what is reported here must be acknowledged. First, the various surveys included firms which were selected using a variety of criteria. However, it is entirely possible, even likely, that some firms participated in more than one of the surveys. Second, the surveys in total contain a disproportionately large fraction of very large firms. Third, as is true in many surveys, the results reported here may well be biased by the self-selection which takes place when firms decide to participate.

Capital rationing and discounting in public sector investment decisions

Capital rationing and discounting in public sector investment decisions

Effects of personal taxes and equity issuing costs on the firm's investment decision

The existence of preferential taxes on capital gains relative to ordinary income is widely understood to create a systematic preference for internal rather than external equity financing. This preference is magnified by the existence of issuing costs on new equity. This paper develops a procedure to account for these market imperfections in terms of an adjusted net present value that directly adjusts a project's net present value calculated without regard to the imperfections. Once the correct adjustment procedure is developed, the practical implications of personal taxes and issuing costs on the firm's investment behavior clearly emerges. These market imperfections have created a discontinuous function for the firm in obtaining equity capital. Many rational wealth-maximizing firms are forced to make investment decisions in a situation similar to capital rationing as the separation theorem between investing and financing does not generally hold. This explanation of a potentially long-run need for capital rationing is consistent with otherwise perfect capital markets.

Thoughts on the Merits of Transport-Planning Packages

Transport-planning packages are increasingly being reappraised for technical content and role, in the current climate of capital rationing and short-run planning horizons. This paper outlines in a broad manner the major roles of established packages and suggests the major areas of deficiency, given that the present perceived planning emphasis will hold in the future. The important distinction between the concept of packages per se and the particular models used therein is emphasised. Particular reference is made to the improved Urban Transportation Planning System (UTPS) package of the US Department of Transportation (1977).

Equivalent Mathematical Programming Models of Pure Capital Rationing

In the applications of mathematical programming to the “pure capital rationing” problem, much of the attention has been focused on the search for an appropriate discount rate to account for the time value of money. The essential difficulty was first observed by Hirshleifer [10] in the classical economics context: “The discount rate to be used for calculating present values…cannot be discovered until the solution is attained, and so is of no assistance in reaching the solution.” Baumol and Quandt [1] showed that this problem persists in the Lorie and Savage [11] and Weingartner [15, Chap. 3] mathematical programming formulation and concluded that: “If there is capital rationing and external rates of interest are irrelevant, we cannot simultaneously insist on a present value formulation of the objective function and have the relevant discount rates determined internally by our program.” They then went on to propose an alternative utility formulation of the objective function.

A Model for Planning the Development of Industrial Plantations

SUMMARY A planning system, with a horizon of 25 years was developed for a plantation enterprise in Victoria. It extended the well-known application of linear programming to yield control to the selection of intensive silvicultural methods and capital rationing. The broad range of decisions evaluated by model included:—buying land; selecting the extent, location and methods of annual planting; investing in tree breeding; fertilising after planting; yield control by prescribing thinning regimes and setting clear felling ages; purchasing outside wood; budgeting and rationing of capital invested in plantation development. The construction and use of the analytical models was integrated into the decision-making structure of the organisation. Use of the system demonstrated the interactions between demands, budgets, thinning method, age of clear felling, planting method and fertilisation.

An Analysis of Linear Programming Formulations for the Capital Rationing Problem

An Analysis of Linear Programming Formulations for the Capital Rationing Problem

Capital Rationing: n Authors in Search of a Plot

Capital Rationing: n Authors in Search of a Plot

CAPITAL RATIONING: n AUTHORS IN SEARCH OF A PLOT

The Journal of FinanceVolume 32, Issue 5 p. 1403-1431 Article CAPITAL RATIONING: n AUTHORS IN SEARCH OF A PLOT H. Martin Weingartner, H. Martin WeingartnerThe author is Professor of Finance at the Graduate School of Management of Vanderbilt University. This work was begun during the author's stay at Aarhus University in December 1974 and has benefited from discussions with Dr. Jorgen Aase Nielsen. An earlier version of this paper was presented at Duke University in February, 1975. The author also gratefully acknowledges helpful comments from members of the Finance Workshop of the Graduate School of Management of the University of Rochester and of Bernell Stone, a referee for this Journal. He absolves all these of responsibility for any errors which remain.Search for more papers by this author H. Martin Weingartner, H. Martin WeingartnerThe author is Professor of Finance at the Graduate School of Management of Vanderbilt University. This work was begun during the author's stay at Aarhus University in December 1974 and has benefited from discussions with Dr. Jorgen Aase Nielsen. An earlier version of this paper was presented at Duke University in February, 1975. The author also gratefully acknowledges helpful comments from members of the Finance Workshop of the Graduate School of Management of the University of Rochester and of Bernell Stone, a referee for this Journal. He absolves all these of responsibility for any errors which remain.Search for more papers by this author First published: December 1977 https://doi.org/10.1111/j.1540-6261.1977.tb03345.xCitations: 37 Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume32, Issue5December 1977Pages 1403-1431 RelatedInformation

The Ideology of Labor and Capitalist Rationality in Gramsci

The Ideology of Labor and Capitalist Rationality in Gramsci

Capital Budgeting with Mixed Integer Linear Programming: An Application

Where capital rationing exists among on-going and proposed businesses, a firm cannot rank independent investments using any of the conventional evaluation methods [1]. The problem arises because of the thousands of individual investment opportunities, only a small fraction of which can be identified over a twenty-year planning period. The standard financial decision models are used in short-range tactical planning when future funds have been allocated and identifiable projects are being considered. For long-range planning, a linear programming approach can be used to find the level of investment in these businesses that will maximize the profitability of the company through time. Many institutions have adopted such corporate models [5, 7]. These models take many forms, but they are all used to generate more timely and accurate economic planning information. This paper describes the structure of a linear programming model and how it is used in the strategic planning process by Cities Service Company. The structure of the model used by Cities Service Company was tailored to the needs of corporate planning and the nature of information available. Corporate planning required a model that would depict levels of activity, risks, and opportunities in the company's diverse businesses according to the varying (and possibly conflicting) objectives of the corporation. This model was created to 1) select the best alternatives consistent with the objectives of the corporation and the available resources; 2) aggregate the forecasts and project corporate financial statistics; 3) determine the sensitivity of the selected alternatives to varying objectives and constraints; and 4) show cash bottlenecks for possible rescheduling of capital expenditures, projection of borrowing requirements, and anticipation of dividend capabilities.

Capital Rationing and Market Discount Rates: Some Common Fallacies

Arguments proposing the use of market discount rates for optimal investment criteria under conditions of “capital rationing” are examined. Several recent analyses assume one side of the capital market, either firms or individual investors, is subject to capital rationing while the other side is not. It is argued here that all market participants face perfect market opportunities or that none do. Several recent “solutions” are shown either to be consistent with the perfectly competitive market solution in which the familiar present value criterion is appropriate, or else to be fallacious.

Designing Financial Policies to Deal with Limited Financial Resources

One accepted solution to a cash shortage is limiting investment to a level that can be supported by available funds. Models of capital budgeting under conditions of capital rationing illustrate the limitedinvestment solution. However, managers can take other actions to alleviate a shortage of cash, but these alternatives, including increasing price or restricting credit to customers, have not been adequately evaluated in the financial literature. Instead, managers have had to rely on intuition and experience to estimate the possible consequences of their actions. Unfortunately, two factors greatly complicate the design of financial policies by this means. First, the multiplicity of influences on a firm's cash flow greatly complicate analysis. Many complex interactions are inherent in a firm's accounting structure, debt-maturity structure, and tax and dividend payments. Moreover, a policy change often produces opposing effects on cash flow; e.g., an increase in price increases the cash flow from a unit sale but also reduces the number of unit sales, thereby also lowering the required supporting investment in productive assets. As another example, a reduction in credit period may not only decrease the delay between the time of a sale and the resulting cash inflow,but also may lower the volume of sales. Interactions between sales and cash flow are further complicated because a firm's level of sales is determined not only by the price of its product or its credit terms, but also by the availability of competing products. Consequently, the net effect of a price (or credit period) change also depends on the change in relative product availability following the initial increase or decrease in unit sales.

Relevant Criterion Rates in Capital Budgeting*

This paper develops, using graphical analysis, a series of models relating immediate investment opportunities to various investment opportunity costs and the costs of financing. The block nature of much long‐term finance is recognized in the analysis and the situations in which different concepts are relevant to the establishment of criterion rates, when capital rationing does not exist, are identified.The author recommends that, in the absence of capital rationing or strongly held expectations of increases in financing costs in the near future, in practice criterion rates he based on the weighted average cost of the marginal set of finance.

On the Existence of a Cost of Capital Under Pure Capital Rationing

On the Existence of a Cost of Capital Under Pure Capital Rationing

Benefit‐Cost Ratios Versus Net Present Value: Revisited

This paper extends the rigorous examination and comparison, begun by Schwab and Lusztig, of the ranking characteristics of Benefit‐Cost Ratios and Net Present Value. The algebraic analysis shows the circumstances under which these evaluation techniques give a contradictory ranking of investment projects and identifies the differing implicity reinvestment assumptions; the validity of these assumptions is examined. There is still dispute concerning which technique is preferable under uncertainty and which under capital rationing; this paper attempts to resolve these issues.

Borrowing and Lending in a Mathematical Programming Model of Capital Budgeting

Weingartner, in 1963, published his solution to the Lorie and Savage problem of choosing the optimal combination of projects given that capital rationing occurs in more than one period. This paper discusses the rationale of the Weingartner model and develops a systematic way of treating lending. Indeed not to include lending can lead to sub‐optimal results. Borrowing is then included into the model at the cost of making certain restrictive assumptions.

Marginality and commitment as hidden variables in the Jellinck/Weber/Merton theses on the Calvinist Ethic

This article is a modest and frankly speculative attempt to draw the atten tion to two variables which (a) could possibly be 'behind' the more tradi tional ones, such as asceticism, objectivity, efficiency, rationality and individualism mentioned as salient for the original development of rational capitalism, natural science and modern democracy, and (b) could possibly provide an interesting fit with sociological theory and the sociology of religion.