Presentation Submitted by

Mustafa . M . Mushrif

Submitted to Date
Pervez sir 19-04-2020
 Presentation on Topics

• Introduction to Financial System

• Financial Market
• Capital Rationing Meaning
• Objectives of Capital Rationing
 Introduction to Financial System
A financial system is a set of institutions, such as banks,
insurance companies, and stock exchanges, that permit
the exchange of funds. Financial systems exist on firm,
regional, and global levels. Borrowers, lenders, and
investors exchange current funds to finance projects,
either for consumption or productive investments, and to
pursue a return on their financial assets. The financial
system also includes sets of rules and practices that
borrowers and lenders use to decide which projects get
financed, who finances projects, and terms of financial
deals.
 Financial Market
Financial Market refers to a marketplace, where
creation and trading of financial assets, such
as shares, debentures, bonds, derivatives,
currencies, etc. take place. It plays a crucial
role in allocating limited resources, in the
country’s economy. It acts as an intermediary
between the savers and investors by
mobilizing funds between them.
• Financial markets involve borrowers, lenders, and
investors negotiating loans and other transactions. In
these markets, the economic good traded on both sides
is usually some form of money: current money (cash),
claims on future money (credit), or claims on the future
income potential or value of real assets (equity). These
also include derivative instruments. Derivative
instruments, such as commodity futures or stock
options, are financial instruments that are dependent
on an underlying real or financial asset's performance.
In financial markets, these are all traded among
borrowers, lenders, and investors according to the
normal law of Supply and Demand.
 Capital Rationing Meaning
Capital rationing is the act of placing restrictions
on the amount of new investments or projects
undertaken by a company. This is accomplished
by imposing a higher cost of capital for
investment consideration or by setting a ceiling
on specific portions of a budget. Companies
may want to implement capital rationing in
situations where past returns of an investment
were lower than expected.
 Objectives of Capital Rationing
• If a company could raise unlimited funds, it would have to
undertake all capital projects having positive net present
value (NPV). Such a capital budgeting decision is optimal
because it allows shareholder value to be maximized in the
long run.
• In the real world, however, a company cannot raise infinite
funds because the capacity of the capital market is limited.
This is the primary factor why capital rationing may arise.
• Thus, the objective of the management of a company is to
achieve maximum increase of shareholder value when
there are capital budget constraints.