Arizona State University (ASU) Fin300 Fundamentals of Finance Final Practice Exam

Capital rationing refers to the scenario where a company has limited resources available for investment, which leads to the necessity of prioritizing projects. When budget constraints are present, firms cannot pursue all investment opportunities, so they must evaluate and select projects that will yield the highest returns relative to the resources available.

This process involves assessing various investment projects based on their potential profitability and strategic alignment with the company's goals. By prioritizing investments, companies can maximize their overall return on investment, making the most efficient use of the limited capital at their disposal. In essence, capital rationing forces firms to make decisions on which opportunities are most worthwhile, balancing risk and return in a constrained financial environment.

The other options outline concepts that do not align with the principles of capital rationing; they either imply unrestricted investment or overlook the essential aspect of resource allocation driven by financial limits.