How might capital rationing conflict with the goal of maximizing shareholders' wealth?

What will be an ideal response?

The use of our capital-budgeting decision rules implies that the size of the capital budget is determined by the
availability of acceptable investment proposals. However, a firm may place a limit on the dollar size of the capital
budget, they are recognizing that they do not have the ability to profitably handle more than a certain number of new
and/or large projects. This situation is called capital rationing.
Capital rationing has a negative effect on the firm. To what degree it is negative depends on the severity of the
rationing. If the rationing is minor and short-lived, the firm's share price will not suffer to any great extent. In this case,
capital rationing can probably be excused, although it should be noted that any capital-rationing action that rejects
projects with positive NPVs is contrary to the firm's goal of maximization of shareholders' wealth. If the capital
rationing is a result of the firm's decision to limit dramatically the number of new projects or to use only internally
generated funds for projects, then this policy will eventually have a significantly negative effect on the firm's share
price. For example, a lower share price will eventually result from lost competitive advantage if, because of a decision
to arbitrarily limit its capital budget, a firm fails to upgrade its products and manufacturing processes.