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Capital rationing for Financial Management and Policy MCOM sem 2 Delhi University

Capital rationing for Financial Management and Policy MCOM sem 2 Delhi University

Capital rationing for Financial Management and Policy MCOM sem 2 Delhi University

Capital rationing is the process of putting restrictions on the projects that can be undertaken by the company or the capital that can be invested by the company. This aims in choosing only the most profitable investments for the capital investment decision. This can be accomplished by putting restrictive limits on the budget or selecting a higher cost of capital as the hurdle rate for all the projects under consideration. Capital rationing can be either hard or soft.

Capital rationing for Financial Management and Policy MCOM sem 2 Delhi University

The main goal of capital rationing is to protect a company from over-investing its assets. If this were to occur, the company might continue to see low return on investment and even face a compromised financial position. Further, this can cause a company’s stock to drop.
The main benefit of capital rationing is budgeting a company’s corporate resources. When a company issues stock or borrows money, it can use these resources for new investments. However, if the company does not see a good return on investments, it is wasting these resources. By capital rationing, which is the process of increasing the cost of capital, the company can make sure it takes on fewer projects. Further, it can take on only projects for which the anticipated return on investment is high. This will prevent the company from over-extending its finances, which would cause a decrease in stock price and stability.

Capital rationing for Financial Management and Policy MCOM sem 2 Delhi University

Financial management refers to the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization. It is the specialized function directly associated with the top management. The significance of this function is not seen in the ‘Line’ but also in the capacity of ‘Staff’ in overall of a company. It has been defined differently by different experts in the field.

The term typically applies to an organization or company’s financial strategy, while personal finance or financial life management refers to an individual’s management strategy. It includes how to raise the capital and how to allocate capital, i.e. capital budgeting. Not only for long term budgeting, but also how to allocate the short term resources like current liabilities. It also deals with the dividend policies of the share holders.

Capital rationing for Financial Management and Policy MCOM sem 2 Delhi University

Mcom syllabus:- Programme Structure

The M.Com. Programme is divided into two parts as under. Each Part will consist of two Semesters.

Semester Semester
Part – IFirst Year Semester ISemester II
Part – II Second YearSemester IIISemester IV

Mcom syllabus:- Mcom course details

Mcom syllabus:- Part I

Semester I

  • Organisation Theory and Behavior

    • Organizational Theories and Behavior
    • Group Decision making and Communication
    • Motivation
    • Leadership, Power and Conflict
    • Organisational Culture, Organisational Development and Stress Management
    • Case Studies
  • Statistical Analysis

    • Probability and Expectation
    • Probability Distribution
    • Statistical Decision Theory
    • Sampling and Sampling Distributions
    • Hypothesis Testing
    • Non-Parametric Tests
    • Regression Analysis
    • Statistical Quality Control
    • Case Studies
  • Economic Analysis

    • Firm and its objectives
    • Consumer Behavior
    • Production and Cost
    • Cost function
    • Price and output relationship under different market structures
    • Pricing practices
    • Factor pricing
    • Economics of information
    • Technological change and the global market economy
    • Cases
  • Financial Management and Policy

    • Financial Management
    • Capital Budgeting Decisions
    • Capital Structure
    • Dividend Policy
    • Working Capital Planning and Management
    • Corporate re-structuring

Semester II

  • Managerial Accounting

    • Management Accounting
    • Cost Concepts and Classifications
    • Activity Based Product Costing
    • Variable and Absorption Costing
    • Cost-Volume-Profit (CVP) Analysis
    • Relevant Information and Short-Run Managerial Decisions
    • Budgeting
    • Standard Costing
    • Responsibility Accounting and Divisional Performance Measurement
    • Divisional Performance Measurement
  • Business Environment
  • Quantitative Techniques for Business Decisions

    • Introduction
    • Linear Programming
    • Transportation
    • Assignment
    • Integer Programming
    • Inventory Control
    • PERT/CPM
    • Markov Analysis
    • Game Theory
    • Queuing Theory
    • Sequencing
    • Replacement Analysis
    • Simulation
  • Marketing Management

    • Introduction
    • Marketing Environment
    • Buyer behavior
    • Market Segmentation, Targeting and Positioning
    • Product Decision
    • Pricing Decisions
    • Distribution Decisions
    • Promotion Decisions
    • Marketing Planning, Organizing and Control
    • Social, Ethical and Legal Aspects of Marketing

Mcom syllabus:- Part II

Semester III

  • Strategic Management

    • Introduction
    • Strategic Analysis
    • Strategic Choice
    • Strategic Implementation
    • Strategic Review
  • Accounting Theory and Practice

    • Accounting Theory
    • Depreciation policy.
    • Conceptual framework of financial accounting and reporting.
    • Issues in accounting standard setting
  • Elective I (Paper 1)
  • Elective II (Paper 1)

Semester IV

  • International Business

    • International Business
    • Theoretical Foundations of International Trade
    • Instruments of Commercial Policy
    • Balance of Payment Account
    • International Economic Institutions and Agreements
    • Regional Economic Integration
    • International Business Environment
    • International Financial Environment
    • Multinationals (MNCs) in International Business
    • Contemporary Developments and Issues in International Business.
  • Human Resource Management

    • Nature of Human Resource Management, concepts, functions, themes and controversies.
    • HRM, Job Analysis and Job Design
    • Business Strategy and Human Resource Strategy
    • Recruitment, Selection, Training and Development
    • Performance appraisal
    • Diversity at Work
    • Compensation Management, Personnel audit and Research
    • Career planning and succession concepts, approaches and issues
    • Human Resource information system
    • Employees relations
    • Case Studies
  • Elective I (Paper 2)
  • Elective II (Paper 2)

Capital rationing for Financial Management and Policy MCOM sem 2 Delhi University

Capital rationing ADVANTAGES


Capital rationing prevents wastage of resources by not investing in each and every new project available for investment.


Through capital rationing, companies invest only in projects where the expected return is high, thus eliminating projects with lower returns on capital.


The first and an important advantage are that capital rationing introduces a sense of strict budgeting of corporate resources of a company. Whenever there is an injunction of capital in the form of more borrowings or stock issuance capital, the resources are properly handled and invested in profitable projects.


As the company is not investing in every project, the finances are not over-extended. This helps in having adequate finances for tough times and ensures more stability and increase in the stock price of the company.


Capital rationing ensures that less number of projects are selected by imposing capital restrictions. This helps in keeping the number of active projects to a minimum and thus manage them well.

Capital rationing DISADVANTAGES


In addition to limits on budget, capital rationing also places selective criteria on the cost of capital of shortlisted projects. However, in order to follow this restriction, a firm has to be very accurate in calculating the cost of capital. Any miscalculation could result in selecting a less profitable project.


Capital rationing does not allow for maximising the maximum value creation as all profitable projects are not accepted and thus, the NPV is not maximized.


Capital rationing may lead to the selection of small projects rather than larger scale investments.


Under efficient capital markets theory, all the projects that add to company’s value and increase shareholders’ wealth should be invested in. However, by following capital rationing and investing in only certain projects, this theory is violated.

Capital rationing for Financial Management and Policy MCOM sem 2 Delhi University

Objectives of Financial Management

  • Profit maximization occurs when marginal cost is equal to marginal revenue. This is the main objective of Financial Management.
  • Wealth maximization means maximization of shareholders’ wealth. It is an advanced goal compared to profit maximization.
  • Survival of company is an important consideration when the financial manager makes any financial decisions. One incorrect decision may lead company to be bankrupt.
  • Maintaining proper cash flow is a short run objective of financial management. It is necessary for operations to pay the day-to-day expenses e.g. raw material, electricity bills, wages, rent etc. A good cash flow ensures the survival of company.
  • Minimization on capital cost in financial management can help operations gain more profit.

Scope of Financial Management

  • Estimating the Requirement of Funds: Businesses make forecast on funds needed in both short run and long run, hence, they can improve the efficiency of funding. The estimation is based on the budget e.g. sales budget, production budget.
  • Determining the Capital Structure: Capital structure is how a firm finances its overall operations and growth by using different sources of funds.[4] Once the requirement of funds has estimated, the financial manager should decide the mix of debt and equity and also types of debt.
  • Investment Fund: A good investment plan can bring businesses huge returns.

Capital rationing for Financial Management and Policy MCOM sem 2 Delhi University

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