Business Studies · Financial Management

Evaluate the following three statements: Statement 1: Capital rationing occurs when a firm has more acceptable high-quality investment opportunities than funds available, requiring selection of a combination that maximizes total NPV. Under capital rationing, the Profitability Index (PI) is useful but ranking by PI can be misleading for mutually exclusive projects of different sizes. Statement 2: A term loan is used for acquisition of fixed assets and repaid over a period exceeding one year. In appraisal, banks evaluate the Break-Even Point where total revenue equals total cost (lower is preferred) and monitor the Security Cover (ratio of collateral value to outstanding loan), typically ensuring it remains above 1.25 to 1.50. Statement 3: Sensitivity analysis is a risk assessment technique determining how NPV changes in response to changes in a single underlying variable while keeping other factors constant, helping management identify critical variables. Which of the following evaluations is entirely accurate?