Capital budgeting under capital rationing

Abstract

This thesis presents a capital rationing problem where both investment and financing decisions are considered in imperfect capital markets. The capital rationing problem allows for project indivisibilities and lets the borrowing interest rate vary from period to period closely related to the size of debt and equity. This situation is neither the pure capital rationing nor the perfect capital markets. Thus, the decision problem lies between the pure capital rationing and perfect capital markets extremes. The capital rationing problem is formulated in a mixed integer non-linear programming problem. By characterizing the dominance properties of solutions, an implicit enumeration algorithm is developed and numerical examples are included.