Advanced Corporate Finance
Perfect Capital Markets 1
--- all securities are fairly priced; --- there are no taxes or transaction costs; --- total cash flows of the firms projects are not affected by how the firm finances them.
8. Agency Costs and the Trade-Off Theory ■ We can extend the trade-off theory to include agency costs. The value of a firm, including agency costs and benefits, is:
...V L = V U + PV(Interest Tax Shield) - PV(Financial Distress Costs) - PV(Agency Costs of Debt) + PV(Agency Benefits of Debt) (16.3) Optimal leverage is the level of debt that maximizes V L.
MMI LEVERAGED RECAPITALIZATION ISSUE OF DEBT --- TO REPURCHASE SHARE NO EFFECT OF THE SHARE PRICE A firm can change its capital structure at any time by issuing new securities and using the funds to pay its existing investors.
An example is a LEVERAGED RECAPITALIZATION in which the firm borrows money, issues debt and REPURCHASES SHARES, or pays a dividend. MM Proposition I implies that such transactions will not change the share price.
FINANCING A FIRM WITH EQUITY 1 1. Calculate the NPV of the project (using the cost of capital as a discount factor) - project cash flows depend on the overall economy, they contain market risk.
As a result, investors demand a risk premium. The current risk-free rate is 5% and suppose that given the market risk of investment the appropriate risk premium is 10%. The cost of capital will be 15%.
FINANCING A FIRM WITH EQUITY 4 UNLEVERED EQUITY Equity in a firm with NO DEBT is called UNLEVERED EQUITY.
Because, there is no debt, the date 1 cash flows of the unlevered equity are equal to those of the project. The expected return on the unlevered equity EQUALS the risk of the project, shareholders are earning an appropriate return for the risk they are taking.
Major plan for expansion: BORROWING
Borrowing could be another option, given the strong BS of the firm, it should be able to borrow at a 6% interest rate. Does the interest rate make BORROWING a better choice of financing? Would this affect the NPV of the expansion, and therefore change the value of the firm and its share price?
6. Exploiting Debt Holders: The Agency Costs of Leverage
Cashing out: Shareholders have an incentive to liquidate assets at prices below their market values and distribute the proceeds as a dividend..
Financial Distress & Managerial Incentives and Information
Direct and Indirect Costs of Default and Financial Distress Trade Off Theory
Bankruptcy is a costly process that imposes both direct and indirect costs on a firm and its investors. 1
Direct costs include the costs of experts and advisors such as lawyers, accountants, appraisers, and investment bankers hired by the firm or its creditors during the bankruptcy process.
FINANCING A FIRM WITH DEBT AND EQUITY LEVERED EQUITY
Equity in a firm that also has debt outstanding is called LEVERED EQUITY. !!! Promised payments to debt holders must be made BEFORE any payments to equity holders are distributed. 1. Debt holders FIRST 2. Equity holders Second
1.Corporate Debt ■ International bonds are classified into four broadly defined categories: domestic bonds, which trade in foreign markets; foreign bonds, which are issued in a local market by a foreign entity;
Eurobonds, which are not denominated in the local currency of the country in which they are issued; and global bonds, which trade in several markets simultaneously.
5. Payout Versus Retention of Cash Inn addition to the tax disadvantage of holding cash, agency costs may arise, as managers may be tempted to spend excess cash on inefficient investments and perks. Without pressure from shareholders, managers may choose to horde cash to spend in this way or as a means of reducing a firm's leverage and increasing their job security.
Even though there is a tax disadvantage to retaining cash, some firms accumulate cash balances. Cash balances help firms minimize the transaction costs of raising new capital when they have future potential cash needs. However, there is no benefit to shareholders from firms holding cash in excess of future investment needs.
5. Optimal Capital Structure with Taxes The optimal fraction of debt, as a proportion of a firms capital structure, DECLINES WITH THE GROWTH RATE OF THE FIRM.
From a tax perspective, the firms optimal level of debt is proportional to its current earnings. The higher the growth rate, the higher the value of equity. As a result, the optimal proportion of debt in the firms capital structure (D/(E+D)) will be lower, the HIGHER the FIRMS GROWTH RATE.
IPO
IPO Valuation Multiples vs. DFCF with WACC Issuance costs
2. The Costs of Bankruptcy and Financial Distress U.S. firms can file for bankruptcy protection under the provisions of the 1978 Bankruptcy Reform Act. ■ In a Chapter 7 liquidation, a trustee oversees the liquidation of the firm's assets. ■ In a Chapter 11 reorganization, management attempts to develop a reorganization plan that will improve operations and maximize value to investors.
If the firm cannot successfully reorganize, it may be liquidated under Chapter 7 bankruptcy.
FINANCING A FIRM WITH EQUITY 2
If the project is financed using EQUITY ALONE, how much would investors be willing to pay for the firms shares? In the absence of arbitrage, the price of a security EQUALS the PRESENT VALUE OF ITS CASH FLOWS.
1. Default and Bankruptcy in a Perfect Market
In the Modigliani-Miller setting, leverage may result in bankruptcy, but bankruptcy alone does not reduce the value of the firm. With perfect capital markets, bankruptcy shifts owner- ship from the equity holders to debt holders without changing the total value available to all investors.
Bankruptcy is a costly process that imposes both direct and indirect costs on a firm and its investors. 2
Indirect costs include the loss of customers, suppliers, employees, or receivables during bankruptcy. Firms also incur indirect costs when they need to sell assets at distressed prices.
2. Valuing The Interest Tax Shield When we consider corporate taxes, to total value of LEVERED FIRM equals the value of an UNLEVERED FIRM PLUS THE PRESENT VALUE OF THE INTEREST TAX SHIELD.
LEVERED FIRM VALUE = unlevered firm PLUS the interest tax shield V (L) = V (U) + PV (Interest Tax Shield)
Capital Structure Fallacies I More leverage-- increase in the EPS --- increase in the share price While EPS increases on average, this increase is necessary to compensate shareholders for additional risk they are taking, so the firms share price DOES NOT INCREASE as a result of the transaction.
Leverage can raise a firms expected earnings per share and its return on equity, BUT it also increases the volatility of earnings per share and the riskiness of its equity. As a result, in a perfect market shareholders are NOT better off and the value of equity is unchanged.
2. FINANCING A FIRM WITH DEBT AND EQUITY 3 LEVERED EQUITY What price E should the levered equity sell for, and which is the best capital structure choice for the firm.
MM Theory --> With perfect capital markets, the total value of a firm should not depend on its capital structure. The firms total cash flows still EQUAL THE CASH FLOWS OF THE PROJECT, and therefore have the same present value of 1000.
Major plan for expansion: EQUITY FINANCING - ISSUE SHARES - COST OF EQUITY
One possibility is to RAISE FUNDS by selling shares of the firms stock. To pursue the expansion, CEO plans to raise $50 mill from OUTSIDE INVESTORS. Due to the firms risk, equity investors will require a 10% risk premium over 5% risk free rate - cost of equity will be 15%.
4. Personal taxes
Personal taxes OFFSET the corporate tax benefits of leverage. Every $1 received after taxes by debt holders from interest payments COSTS equity holders $(1-t*) on the after-tax basis look for the effective tax advantage of debt formuls (568p)
Chapter Debt and Taxes
Pretax WACC WACC (exercises) Personal taxes Other Tax Shields
1.Corporate DebtTTT
Private debt can be in the form of term loans or private placements. A term loan is a bank loan that lasts for a specific term. A private placement is a bond issue that is sold to a small group of investors.
Payout Policy
Share Repurchase vs. Dividend Payment different clientels target of investors consider the general economic situation when deciding on the payout policy
FINANCING A FIRM WITH DEBT AND EQUITY 1 Financing the firm only with equity is not the only option. She can also raise part of the initial capital using debt.
She decides to borrow 500$ initially, in addition to selling equity. - The projects cash flow will always be enough to repay the debt, the debt is risk free. Thus, the firm can borrow at the risk free interest rate of 5% and it will owe the debt holders 500*1,05=525 in one year.
Conclusion levered vs. unlevered equity The fact that the equity is less valuable with LEVERAGE does not mean that the entrepreneur is worse off.
She will still raise a total of 1000$ by issuing both debt and levered equity, JUST AS SHE DID WITH UNLEVERED EQUITY ALONE. As a consequence, she will be INDIFFERENT between these 2 choices for the firm capital structrure.
FINANCING A FIRM WITH EQUITY 3 Because the firm has NO other liabilities, equity holders will receive all of the cash flows generated by the project on date 1, so the MARKET VALUE OF THE FIRMS EQUITY TODAY will be PV (EQUITY CASH FLOWS) = 1150/1.15=1000
So, the entrepreneur can raise 1000$ by selling the equity in the firm. After paying the investment cost of 800$, the entrepreneur can keep the remaining 200$ - the projects NPV -- as a profit. In other words, the projects NPV represents the value to the initial owners of the firm created by the project ( in this case, the entrepreneur).
MMII DEBT is less risky than equity, so it has a lower cost of capital. Leverage increases the risk of equity, however, raising the cost of capital.
The benefit of debts lower cost of capital IS OFFSET by the HIGHER EQUITY COST OF CAPITAL, leaving the firms weighted average cost of capital WACC unchanged with perfect capital markets.
2. Valuing The Interest Tax Shield
The firm PRETAX WACC measures the required return to the firms investors. Its effective after tax WACC, measures the cost to the firm after including the benefit of the interest tax shield. Absent other market imperfections, the WACC DECLINES WITH THE A FIRMS LEVERAGE.
1. The Interest Tax Deduction Because interest expense is tax deductible,LEVERAGE increases the total amount of income available to all investors.
The gain to investors from the tax deductibility of interest payments is called the INTEREST TAX SHIELD. INTEREST TAX SHIELD = CORPORATE TAX RATE x INTEREST PAYMENTS
5. Optimal Capital Structure with Taxes
The interest expense of the average firm is well below the taxable income, implying that firms do NOT fully exploit the tax advantage of debt, due to the risk of financial distress and default, should the firm be unable to meet its financial obligations towards its debtholders.
Capital Structure 2
The most common choice of financing are 1. FINANCING THROUGH EQUITY and 2. FINANCING THROUGH A COMBINATION OF DEBT AND EQUITY
5. Optimal Capital Structure with Taxes
The optimal level of leverage from a tax-saving perspective is the level such that interest equals EBIT. In this case, the firm takes full advantage of the corporate tax deduction of interest, but avoids the tax disadvantage of excess leverage at the personal level.
Capital Structure 1
The relative proportions of debt and equity, and other securities that a firm has outstanding constitute its capital structure. When corporations raise funds from outside investors, they must choose which type of security to issue.
Capital Structure Fallacies I Because the firms earnings per share and price earnings ratios (also ROE) are affected by LEVERAGE, we cannot reliably compare these measures across firms with different capital structures.
Therefore, most analysts prefer to use performance measures and valuation multiples that are based on the firms earnings before interest has been deducted. For example, the ratio of enterprise value to EBIT (EBITDA) is more useful when analysing firms with very different capital structures than is comparing their P/E ratios.
2. FINANCING A FIRM WITH DEBT AND EQUITY 4 LEVERED EQUITY Because the CFs of the debt and equity sum to the CFs of the project, by the Law of One Price the combined values of debt and equity must be 1000$.
Therefore, the value of the debt is 500$, the value of the levered equity must be: E=1000-500=500. Because the CFs of LEVERED EQUITY (875 vs. 375) are smaller than those of UNLEVERED EQUITY (1400 vs. 900), LEVERED EQUITY WILL SELL FOR A LOWER PRICE (500$ VS. 1000$).
The Effect of Leverage on Risk and Return LEVERAGE INCREASES THE RISK OF EQUITY OF A FIRM INVESTORS WILL REQUIRE A HIGHER RETURN TO COMPENSATE FOR ITS INCREASED RISK (LEVERED EQUITY). Leverage increases the risk of equity even when there is no risk that the firm will default.
Thus, while debt may be CHEAPER when considered in its own, it RAISES the cost of capital of equity. But considering both sources of capital together, the firms average cost of capital with leverage is 0,5*0,05 + 0,5*0,25 = 15%, the same as for the unlevered firm.
4. Optimal Capital Structure:TheTrade-OffTheory According to the trade-off theory, the total value of a levered firm equals the value of the firm without leverage plus the present value of the tax savings from debt minus the present value of financial distress costs:
V L = V U + PV(Interest Tax Shield) - PV(Financial Distress Costs) (16.1) Optimal leverage is the level of debt that maximizes V L.
2. Valuing The Interest Tax Shield
When a firm marginal tax rate is constant, and there are no personal taxes, the present value of the interest tax shield from permanent debt equals the tax rate times the value of debt (tcD).
Capital Structure in a Perfect Market
When a firm needs to raise new funds to undertake its investments, it must decide which type of security it will sell to investors. Even absent a need for new funds, firms can issue new securities and use the funds to REPAY DEBT or REPURCHASE SHARES.
3. RECAPITALIZING TO CAPTURE THE TAX SHIELD (LEVERED RECAPITALIZATION) - company issue debt to repurchase shares to take advantage of tax shield
When securities are fairly priced, the original shareholders of a firm capture the full benefit of the interest tax shield from an increase in leverage.
3. Financial Distress Costs and Firm Value
When securities are fairly priced, the original shareholders of a firm pay the present value of the costs associated with bankruptcy and financial distress.
2. Valuing The Interest Tax Shield
When the firm maintains a target leverage ratio, we compute the LEVERED VALUE VL at the present value of its free cash flows using the WACC, whereas its UNLEVERED VALUE VU is the present value of its free cash flows using its unlevered cost of capital or pretax WACC.
Capital Structure Fallacies II Dilution As long as shares are sold to investors at a fair price, there is NO COST of dilution associated with issuing equity.
While the number of shares INCREASES when equity is issued, the firms assets also INCREASE because of the cash raised, and the per share value of equity remains unchanged. There are NO CHANGES in the share price in that case.
WACC
With perfect capital markets, a firms WACC is independent of its capital structure and is equal to its equity cost of capital if it is unlevered, which matches the cost of capital of its assets. As the firm borrows at the low cost of capital for debt its equity cost of equity rises. The net effect is that the firms WACC is unchanged.
MM Beyond Prepositions
With perfect capital markets, financial transactions are a zero NPV activity that neither add NOR destroy value on their own, but rather repackage the firms risk and return. Capital structure and financial transactions more generally affect a firms value only because of its impact on some type of market imperfection.
Perfect Capital Markets 2 As long as shares are sold to investors at a fair price, there is NO COST of dilution associated with issuing equity.
With perfect capital markets, the Law of One Price implies that the choice of debt or equity financing will NOT affect the total value of a firm, its share price, or its cost of capital. Thus, in a perfect world, the firm will be indifferent regarding the choice of financing for its expansion.
4. Repayment Provisions ■ A call provision gives the issuer of the bond the right (but not the obligation) to retire the bond after a specific date (but before maturity). .
■ A callable bond will generally trade at a lower price than an otherwise equivalent non-callable bond. ■ The yield to call is the yield of a callable bond assuming that the bond is called at the earliest opportunity.
9. Asymmetric Information and Capital Structure ■ When managers have better information than investors, there is asymmetric information. Given asymmetric information, managers may use leverage as a credible signal to investors of the firm's ability to generate future free cash flow.
■ According to the lemons principle, when managers have private information about the value of a firm, investors will discount the price they are willing to pay for a new equity issue due to adverse selection.
6. Exploiting Debt Holders: The Agency Costs of Leverage Agency costs arise when there are conflicts of interest between stakeholders. A highly levered firm with risky debt faces the following agency costs:
■ Asset substitution: Shareholders can gain by making negative-NPV investments or decisions that sufficiently increase the firm's risk. ■ Debt overhang: Shareholders may be unwilling to finance new, positive-NPV projects.
1.Corporate Debt ■ Four types of corporate bonds are typically issued: notes, debentures, mortgage bonds, and asset-backed bonds. Notes and debentures are unsecured; mortgage bonds and asset-backed bonds are secured.
■ Corporate bonds differ in their level of seniority. In case of bankruptcy, senior debt is paid in full first before subordinated debt is paid.
5. Payout Versus Retention of Cash ■ Modigliani-Miller payout policy irrelevance says that, in perfect capital markets, if a firm invests excess cash flows in financial securities, the firm's choice of payout versus retention is irrelevant and does not affect the value of the firm.
■ Corporate taxes make it costly for a firm to retain excess cash. Even after adjusting for investor taxes, retaining excess cash brings a substantial tax disadvantage for a firm. The effective tax disadvantage of retaining cash is given by see formula
3. Bond Covenants
■ Covenants are restrictive clauses in the bond contract that help investors by limiting the issuer's ability to take actions that will increase the default risk and reduce the value of the bonds.
4. Dividend Capture andTax Clienteles ■ The effective dividend tax rate varies across investors for several reasons, including income level, investment horizon, tax jurisdiction, and type of investment account.
■ Different investor taxes create clientele effects, in which the dividend policy of a firm suits the tax preference of its investor clientele.
2. The Initial Public Offering ■ An initial public offering (IPO) is the first time a company sells its stock to the public. ■ The main advantages of going public are greater liquidity and better access to capital. Disadvantages include regulatory and financial reporting requirements and the undermining of the investors' ability to monitor the company's management.
■ During an IPO, the shares sold may represent either a primary offering (if the shares are being sold to raise new capital) or a secondary offering (if the shares are sold by earlier investors).
1. Distributions to Shareholders ■ When a firm wants to distribute cash to its shareholders, it can pay a cash dividend or it can repurchase shares. ■ Most companies pay regular, quarterly dividends. Sometimes firms announce one-time, special dividends.
■ Firms repurchase shares using an open market repurchase, a tender offer, a Dutch auction repurchase, or a targeted repurchase.
9. Asymmetric Information and Capital Structure ■ Managers are more likely to sell equity when they know a firm is overvalued. As a result, ■ The stock price declines when a firm announces an equity issue. ■ The stock price tends to rise prior to the announcement of an equity issue because managers tend to delay equity issues until after good news becomes public.
■ Firms tend to issue equity when information asymmetries are minimized. ■ Managers who perceive that the firm's equity is underpriced will have a preference to fund investment using retained earnings, or debt, rather than equity. This result is called the pecking order hypothesis.
5. Payout Versus Retention of Cash Dividends and share repurchases help minimize the agency problem of wasteful spending when a firm has excess cash. They also reduce the transfer of value to debt holders or other stakeholders.
■ Firms typically maintain relatively constant dividends. This practice is called dividend smoothing.
DEBT FINANCING 1.Corporate Debt ■ Companies can raise debt using different sources. Typical types of debt are public debt, which trades in a public market, and private debt, which is negotiated directly with a bank or a small group of investors. The securities that companies issue when raising debt are called corporate bonds.
■ For public offerings, the bond agreement takes the form of an indenture, a formal contract between the bond issuer and a trust company. The indenture lays out the terms of the bond issue.
1. Equity Financing for Private Companies ■ Equity investments in private firms are often negotiated in terms of the pre-money valuation of the firm, which is the number of prior shares outstanding times the share price used in the funding round.
■ Given the pre-money valuation and the amount invested: Post@money Valuation = Pre@money Valuation + Amount Invested and the share of the firm held by new investors = amount invested/post-money valuation. ■ Equity investors in private companies plan to sell their stock eventually through one of two main exit strategies: an acquisition or a public offering.
2. Other Types of Debt ■ Municipal bonds ("munis") are issued by state and local governments. Their distinguishing characteristic is that the income on municipal bonds is not taxable at the federal level. ■ An asset-backed security (ABS) is a security that is made up of other financial securities, that is, the security's cash flows come from the cash flows of the underlying financial securities that "back" it. ■ A mortgage-backed security (MBS) is an asset-backed security backed by home mortgages. U.S. government agencies, such as the Government National Mortgage Association (GNMA, or "Ginnie Mae"), are the largest issuers in this sector. ■ Holders of agency-issued mortgage-backed securities face prepayment risk, which is the risk that they will find that the bond will be partially (or wholly) repaid earlier than expected. Holders of privately issued mortgage-backed securities also face default risk. ■ A collateralized debt obligation is an asset-backed security that is backed by other asset-backed securities.
■ Governments, states, and other state-sponsored enterprises issue bonds as well. ■ The U.S. Treasury has issued four different kinds of securities: Treasury bills, Treasury notes, Treasury bonds, and TIPS.
3. The Tax Disadvantage of Dividends ■ In reality, capital markets are not perfect, and market imperfections affect firm dividend policy.
■ If taxes are the only important market imperfection, when the tax rate on dividends exceeds the tax rate on capital gains, the optimal dividend policy is for firms to pay no dividends. Firms should use share repurchases for all payouts.
■ On the declaration date, firms announce that they will pay dividends to all shareholders of record on the record date. The ex-dividend date is the first day on which the stock trades with- out the right to an upcoming dividend; it is usually two trading days prior to the record date. Dividend checks are mailed on the payment date.
■ In a stock split or a stock dividend, a company distributes additional shares rather than cash to shareholders.
3. IPO Puzzles ■ Several puzzles are associated with IPOs. ■ IPOs are underpriced on average.
■ New issues are highly cyclical. ■ The transaction costs of an IPO are high. ■ Long-run performance after an IPO is poor on average.
7. Motivating Managers: The Agency Benefits of Leverage ■ Leverage has agency benefits and can improve incentives for managers to run a firm more efficiently and effectively due to ■ Increased ownership concentration: Managers with higher ownership concentration are more likely to work hard and less likely to consume corporate perks.
■ Reduced free cash flow: Firms with less free cash flow are less likely to pursue wasteful investments. ■ Reduced managerial entrenchment and increased commitment: The threat of financial dis- tress and being fired may commit managers more fully to pursue strategies that improve operations.
6. Exploiting Debt Holders: The Agency Costs of Leverage When a firm has existing debt, debt overhang leads to a leverage ratchet effect:
■ Shareholders may have an incentive to increase leverage even if it decreases the value of the firm. ■ Shareholders will not have an incentive to decrease leverage by buying back debt, even if it will increase the value of the firm.
4. Repayment Provisions ■ Another way in which a bond is repaid before maturity is by periodically repurchasing part of the debt through a sinking fund.
■ Some corporate bonds, known as convertible bonds, have a provision that allows the holder to convert them into equity. ■ Convertible debt carries a lower interest rate than other comparable non-convertible debt
2. Comparison of Dividends and Share Repurchases ■ In perfect capital markets, the stock price falls by the amount of the dividend when a dividend is paid. An open market share repurchase has no effect on the stock price, and the stock price is the same as the cum-dividend price if a dividend were paid instead.
■ The Modigliani-Miller dividend irrelevance proposition states that in perfect capital markets, holding fixed the investment policy of a firm, the firm's choice of dividend policy is irrelevant and does not affect the initial share price.
2. The Initial Public Offering ■ Stock may be sold during an IPO on a best-efforts basis, as a firm commitment IPO, or using an auction IPO. The firm commitment process is the most common practice in the United States. ■ An underwriter is an investment bank that manages the IPO process and helps the company sell its stock.
■ The lead underwriter is responsible for managing the IPO. ■ The lead underwriter forms a group of underwriters, called the syndicate, to help sell the stock.
10. Capital Structure:The Bottom Line
■ There are numerous frictions that drive the firm's optimal capital structure. However, if there are substantial transactions costs to changing the firm's capital structure, most changes in the firm's leverage are likely to occur passively, based on fluctuations in the firm's stock price.
4 The Seasoned Equity Offering ■ A seasoned equity offering (SEO) is the sale of stock by a company that is already publicly traded.
■ Two kinds of SEOs exist: a cash offer (when new shares are sold to investors at large) and a rights offer (when new shares are offered only to existing shareholders). ■ The stock price reaction to an SEO is negative on average.
2. The Initial Public Offering ■ The SEC requires that a company file a registration statement prior to an IPO. The preliminary prospectus is part of the registration statement that circulates to investors before the stock is offered. After the deal is completed, the company files a final prospectus.
■ Underwriters value a company before an IPO using valuation techniques and by book building. ■ Underwriters face risk during an IPO. A GREENSHOE provision is one way underwriters manage the risk associated with IPOs.
1. Equity Financing for Private Companies ■ Private companies can raise outside equity capital from angel investors, venture capital firms, private equity firms, institutional investors, or corporate investors.
■ When a company founder sells stock to an outsider to raise capital, the founder's ownership share and control over the company are reduced.
6. Signaling with Payout Policy ■ The idea that dividend changes reflect managers' views about firms' future earnings prospects is called the dividend signaling hypothesis. ■ Managers usually increase dividends only when they are confident the firm will be able to afford higher dividends for the foreseeable future.
■ When managers cut the dividend, it may signal that they have lost hope that earnings will improve. ■ Share repurchases may be used to signal positive information, as repurchases are more attractive if management believes the stock is undervalued at its current price.
6. Exploiting Debt Holders: The Agency Costs of Leverage
■ With debt overhang, equity holders will benefit from new investment only if see formula
