Case 24
Version 1.1
Eastbo Eastborr o M achi achi ne Tool Tool s Cor Cor por por ation Teaching Note
Synopsis and Objectives
In mid-September 2001, Jennifer Campbell, the chief financial Other cases in which officer of this large CAD/CAM (computer-aided design and dividend policy is an manufacturing) equipment manufacturer must decide whether to pay out important issue: dividends to the firm’s firm’s shareholders, shareholders, or repurchase stock. If Campbell “Deutsche Brauerei” chooses to pay out dividends, she must also decide on the magnitude of the (case 10). payout. A subsidiary question is whether the firm should embark on a campaign campai gn of corporate-image corpor ate-image advertising, a dvertising, and change its corporate name to reflect its new outlook. The case serves as an omnibus review of the many practical aspects of the the dividend and share buyback decisions, including (1) signaling effects, (2) clientele effects, and (3) finance and investment implications of increasing dividend payout and share repurchase decisions. This case can follow a treatment of the Miller-Modigliani1 dividend-irrelevance theorem and serves to highlight practical considerations in setting dividend policy.
1
Merton Miller Mil ler and Franco Franc o Modigliani, Modigl iani, “Dividend Policy, Growth, and the Valuation of Shares,” Journal Journal of of Busines Businesss 34 (October 1961): 411-33.
The general problem in this case is modeled upon a much older case by Robert F. Vandell and Pearson Hunt, which has been out of print for a number of years. It was believed that students students today would benefit benefit from a problem like that, but with a broader set of policy issues i ssues cast in a contemporary setting. Despite numerous differences differences in form and substance between the earlier case and this, t his, the debt to Vandell and Hunt remains large. Vandell was a gracious colleague and mentor to the authors, who hope this work is a respectful memorial to him. Vandell and Hunt produced no teaching note for their case. Our understanding of the Vandell-Hunt Vandell-Hunt case was assisted greatly by notes and comments from from our colleague colle ague Professor Professo r William Willi am W. Sihler, who edited edi ted the older olde r case and reviewed this one. The original version version of this case was prepared by Casey Opitz under the the direction of Robert F. Bruner. This teaching note was written written by Robert F. Bruner. Copyright © 2001 2001 by the University University of Virginia Darden School Foundation, Charlottesville, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
[email protected]. No part of this publication may be reproduced, stored in a retrieval retrieval system, used in a spreadsheet, spreadsheet, or transmitted in any form or by any means—electr means—electronic, onic, mechanical, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.
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Case 24 Eastboro Machine Tools Corporation
Suggested Questions for Advance Assignment to Students
The instructor could assign supplemental reading on dividend policy and share repurchases. Especially recommended are the Asquith and Mullins article2 on equity signaling, and articles by Stern Stewart on financial communication.3 1. In theory, theory, to fund an increased dividend payout payout or a stock buyback, a firm might might invest less, borrow more, or issue more stock. Which of these three elements is Eastboro management willing to vary, and which elements remain fixed as a matter of policy? 2. What happens to Eastboro’s financing need and unused debt capacity if a. b. c. d.
no dividends are paid? a 20 percent payout is pursued? a 40 percent payout is pursued? a residual payout policy is pursued?
Note that case Exhibit 8 presents presents an estimate of the amount of borrowing needed. Assume that maximum debt capacity is, as a matter of policy, 40 percent of book value of equity. 3. How might Eastboro’s various providers of capital, such as stockholders and creditors, react if Eastboro declares a dividend in 2001? What are the arguments for and against against the zero payout, 40 percent pe rcent payout, and residual payout policies? What should Jennifer Campbell recommend to the board of directors with regard to a long-run dividend payout policy for Eastboro Machine Tools Corporation? 4. How might various providers of capital, such as stockholders and creditors, react react if if Eastbor Eastboro o repurchased shares? shares? Should Eastboro do so? 5. Should Campbell Campbel l recommend recomm end the corporate-image advertising campaign and corporate name change to the directors? directors? Do the advertising and name change have any bearing on the the dividend policy or stock repurchase policy p olicy you propose?
Supporting Computer Spreadsheet Diskfiles
For students: UVA-S-F-1360.XLS For instructors: UVA-S-F-1360TN.XLS 2
Paul Asquith and David W. Mullins, Jr., “Signaling with Dividends, Stock Repurchases, and Equity Issues,” Financial Management (Autumn (Autumn 1986): 27-44. 3 See “How to Communicate Communicat e with an Efficient Effi cient Market” and “A Discussion Discussion of Corporate Financial Communication” Communication”in in 2 (Spring 1984). Midland Corporate Finance Journal 2
Case 24 Eastboro Machine Tools Corporation
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Hypothetical Teaching Plan
1. What are the problems here, and what do you recommend? The CFO needs to resolve the issue of dividend payout in order to make a recommendation to the board. She must also decide whether to embark on a stock repurchase program given the sharp drop in share prices. Nominally, the problems entail setting dividend policy, deciding on a stock buyback, and resolving the image-advertising campaign issue. But numerical analysis of the case shows the “problem” includes other factors: setting policy within a financing constraint, signaling the directors’ outlook, and generally, positioning the firm’s shares in the equity market. 2. What are the implications of different payout levels for Eastboro’s capital structure and unused debt capacity? The discussion here must present the financial implications of high dividend payouts, particularly the consumption of unused debt capacity. Because of the cyclicality of demand or overruns in investment spending, some attention might be given to a sensitivity analysis over the entire 2001-07 period. 3. What is the nature of the dividend decision Campbell must make, and what are the pros and cons of the alternative positions? (Or alternatively, Why pay any dividends?) How will Eastboro’s various providers of capital, such as stockholders and bankers, react to a declaration of no dividend? Of a 40 percent payout? Of a “residual” payout? The instructor needs to elicit the notions that the dividend-payout announcement may affect stock price and that at least some stockholders prefer dividends. The signaling and clientele considerations must also be raised. 4. What risks does the firm face? Discussion following this question should address the nature of the industry, the strategy of the firm, and the firm’s performance. This discussion will lay the groundwork for the review of strategic considerations that bear on the dividend decision. 5. What is the nature of the share repurchase decision Campbell must make and how would this affect the dividend decision? The discussion here must present the repercussions of a share repurchase decision on the share price, as well as on the dividend question. Signaling and clientele considerations must also be considered.
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Case 24 Eastboro Machine Tools Corporation
6. Does the stock market appear to reward high dividend payout? Low dividend payout? Does it matter what type of investor owns the shares? What is the impact of dividend policy on share price? The data can be interpreted to support either view. The point is to show that simple extrapolations from stock-market data are untrustworthy, largely because of econometric problems associated with size and omitted variables (see the Black and Scholes article).4 7. What should Campbell recommend? Students must synthesize a course of action from the many facts and considerations raised. The instructor may choose to stimulate the discussion by using an organizing framework such as FRICT (flexibility, risk, income, control, and timing) on the dividend and share repurchase issues. The image advertising and name-change issue will be recognized as another manifestation of the firm’s positioning in the capital markets, and the need to give effective signals. The class discussion can end with a vote on the alternatives, followed by a summary of key points. Exhibits TN1 and TN2 contain two short technical notes on dividend policy, which the instructor may either use as the foundation for closing comments or distribute directly to the students after the case discussion.
Case Analysis Eastboro’s asset needs
The company’s investment spending and financing requirements are driven Discussion by ambitious growth goals (a 15 percent annual target is discussed in the case), Question 2 which are to be achieved by a repositioning of the firm—away from its traditional tools-and-molds business and beyond its CAD/CAM business into a new line of products integrating hardware and software—to provide complete manufacturing systems. CAD/CAM commanded 45 percent of total sales ($340.5 million) in 2000 and is to grow to threequarters of sales ($1,509.5 million) by 2007, which implies a 24 percent annual rate of growth in this business segment over the subsequent seven years. In addition, international sales are expected to grow by 37 percent compounded over the subsequent seven years.5 By contrast, the presses-andmolds segment will grow at about 2.7 percent annually in nominal terms, which implies a negative
4
Fisher Black and Myron Scholes, “The Effects of Dividend Yield and Dividend Policy on Common-Stock Prices and Returns,” Journal of Financial Economics 1 (1974): 1-22. 5 International sales accounted for 15 percent ($114 million) in 2000. They are expected to account for one-half of all sales by 2007 (about $1 billion).
Case 24 Eastboro Machine Tools Corporation
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real rate of growth in what constitutes the bulk of Eastboro’s current business. 6 In short, the company’s asset needs are driven primarily by a shift in the strategic focus of the company. Financial implications of payout alternatives
The instructor can guide the students through the financial implications of various dividend-payout levels either in abbreviated form (for a one-period class) or in detail (for a two-period class). The abbreviated approach uses the total cash-flow figures (i.e., for 2001-07) found in the right-hand column of case Exhibit 8. In essence, the approach uses the basic sources and uses of funds identity:
Discussion Question 3
Asset change = New debt + (Profits - Dividends) With asset additions fixed largely by the firm’s competitive strategy, and with profits determined largely by the firm’s operating strategy and the environment, the remaining large decision variables are (1) changes in debt and (2) dividend payout. Even additions to debt are constrained, however, by the firm’s maximum leverage target, a debt/equity ratio of .40. This framework can be spelled out for the students to help them envision the financial context. Exhibit TN3 presents an analysis of the effect of payout on unused debt capacity based on the projection in case Exhibit 8. The top panel summarizes the firm’s investment program over the forecast period, as well as financing provided from internal sources. The bottom panel summarizes the effect of higher payouts on the firm’s financing and unused debt capacity. The principal insight this analysis yields is that the firm’s unused debt capacity disappears rapidly, and maximum leverage is achieved as the payout increases. Going from 20 to 40 percent dividend payout (an increase in cash flow to shareholders of $95 million),7 the company consumes $134 million in unused debt capacity. Evidently, a multiplier relationship exists between payout and unused debt capacity—every dollar of dividends paid consumes about $1.408 of debt capacity. The multiplier exists because a dollar must be borrowed to replace each dollar of equity paid out in dividends, and each dollar of equity lost sacrifices $.40 of debt capacity that it would have carried.
Whereas the abbreviated approach to analyzing the implications of various dividend-payout levels considers total 2001-07 cash flows, the detailed approach considers the pattern of the individual annual cash flows. Exhibit TN4 reveals that, although the debt/equity ratio associated with the 40 percent payout policy is well under the maximum of 40 in 2007, the maximum is
6
Presses and molds accounted for 55 percent of sales ($416 million) in 2000. By 2007, this segment will account for about one-quarter of sales ($503 million). The implied compound annual growth rate of 2.7 percent is below the projected 3-month Treasury bill rates given in case Exhibit 3, suggesting that the real rate of growth in this segment is below zero. 7 The change in cash flow to shareholders is equal to the difference between dividends paid under the 40 percent policy ($215 million) and the dividends ($107) and stock buy-back ($12) under the 20 percent policy. 8 Unused debt capacity of $134 ÷ additional dividends paid of $95 results in a ratio of about 1.4.
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Case 24 Eastboro Machine Tools Corporation
breached in the preceding years. The graph suggests that a payout policy of 30 percent is about the maximum that does not breach the debt/equity maximum. Exhibits TN5 and TN6 reveal some of the financial-reporting and valuation implications of alternative dividend policies. These exhibits use a simple dividend valuation approach and assume a terminal value estimated as a multiple of earnings. The analysis is unscientific, as the case does not contain the information with which to estimate a discount rate based on CAPM.9 The DCF values show that the firm is slightly more valuable at lower payouts—this is because of the positive impact on EPS of lower interest costs. However, a better inference would be that the differences are not that large and that the dividend policy choice in this case has little effect on value. This conclusion is consistent with the Miller-Modigliani dividend irrelevance theorem.
Regarding the financial-reporting effects of the policy choices, one sees that earnings per share (line 31) and the implied stock price (line 32) grow more slowly at a 40 percent payout policy because of the greater interest expense associated with higher leverage (see line 23). Return on average equity (line 29) rises with higher leverage, however, as the equity base contracts. The instructor could use insights such as these to stimulate a discussion of signaling consequences of the alternative policies, and whether investors even care about performance measures such as EPS and ROE.10 Risk assessment
Neither the abbreviated nor detailed forecasts consider adverse deviations Discussion from the plan. Case Exhibit 8 assumes no cyclical downturn over the seven-year Question 4 forecast period. Moreover, the model assumes that net margin doubles to 5 percent and then increases to 8 percent. The company may be able to rationalize these optimistic assumptions on the basis of its restructuring and the growth of the Artificial Workforce, but such a material discontinuity in the firm’s performance will warrant careful scrutiny. Moreover, continued growth may require new-product development after 2002, which may incur significant research-and-development expenses and reduce net margin. Students will point out that, so far, the company’s restructuring strategy is associated with losses (in 1998 and 2000) rather than gains. Although restructuring appears to have been necessary, the credibility of the forecasts depends on the assessment of management’s ability to begin harvesting potential profits. Plainly, the Artificial Workforce has the competitive advantage at the moment, but the volatility of the firm’s performance in the current period is significant: the ratio of cost of goods sold to sales rose from 61.5 percent in 1999 to 65.9 percent in 2000. Meanwhile, the ratio of selling, general, and administrative expenses to sales is projected to fall from 30.5 percent in 9
A discount rate of 12 percent is used for illustrative purposes. Presumably, the required return on equity would vary with the leverage of the firm. 10 These measures are subject to accounting manipulation and are therefore unreliable. However, many operating executives believe that such measures still retain some influence over the type of equity investors that a firm attracts.
Case 24 Eastboro Machine Tools Corporation
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2000 to 24.3 percent in 2001. Admittedly, the restructuring accounts for some of this volatility, but the case suggests several sources of volatility that are external to the company: recession, currency, new-competitor entry, new-product foul-ups, cost overruns, and surprise acquisition opportunities. A brief survey of risks invites students to perform a sensitivity analysis of the firm’s debt/equity ratio under a reasonable downside scenario. Students should be encouraged to exercise the associated computer spreadsheet model, making modifications as they see fit. Exhibit TN7 presents a forecast of financial results, assuming a net margin that is smaller than the preceding forecasts by 1 percent and sales growth at 12 percent rather than 15 percent. This exhibit also illustrates the implications of a residual dividend policy, i.e., the payment of a dividend only if the firm can afford it and if the payment will not cause the firm to violate its maximum debt ratios. The exhibit reveals that, in this adverse scenario, although a dividend payment would be made in 2001, none would be made in the next two years. Thereafter, the dividend payout would rise. The general insight remains that the unused debt capacity of Eastboro is relatively fragile and easily exhausted. The stock-buyback decision
The decision on whether or not to buy back stock should be that, if the Discussion intrinsic value of Eastboro is greater than its current share price, the shares should be Question 5 repurchased. The case does not provide the information needed to make free cash flow projections, but one can work around the problem by making some assumptions. The DCF calculation presented in Exhibit TN8 uses net income as a proxy for operating income,11 and assumes a WACC of 10 percent, and a terminal value growth factor of 3.5 percent. The equity value per share comes out to $35.72, representing a 61 percent premium over the current share price. Based on this calculation, Eastboro should repurchase shares! However, doing so will not solve Eastboro’s dividend/financing problem. Buying back shares would further reduce the resources available for a dividend payout. Also, a stock buyback may be inconsistent with the message Eastboro is trying to convey (i.e., that it is a growth company). In a perfectly efficient market, it should not matter how investors get their money back (e.g., through dividends or share repurchases), but in inefficient markets, the role of dividends and buybacks as signaling mechanisms cannot be disregarded. In Eastboro’s case, we seem to have the case of an inefficient market; the case suggests that information asymmetries exist between company insiders and the stock market. Clientele and signaling considerations
The profile of Eastboro’s equity owners may influence the choice of dividend policy. Stephen East, the chair of the board and scion of the founders’ families and management (who collectively own about 30 percent of the stock), 11
Discussion Question 6
This violates the rule that free cash flows should reflect prefinancing cash flows. However, we are not given any operating income assumptions.
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Case 24 Eastboro Machine Tools Corporation
seeks to maximize growth in the market value of the company’s stock over time. This goal invites students to analyze the impact of dividend policy on valuation. Nevertheless, some students might point out that, as the population of diverse and disinterested heirs of East and Peterboro grows, the demand for current income might rise. This naturally raises the question, Who owns the firm? The stockholder data in case Exhibit 4 show a marked drift over the past 10 years: away from long-term individual investors and toward short-term traders; and away from growth-oriented institutional investors and toward value investors. At least a quarter of the firm’s shares are in the hands of investors who are looking for a turnaround in the not-too-distant future.12 This lends urgency to the dividend and signaling question. The case indicates that the board committed itself to resuming a dividend as early as possible —“ideally in 2001.” The board’s letter charges this dividend decision with some heavy signaling implications: because the board previously stated a desire to pay dividends, if it now declares no dividend investors are bound to interpret the declaration as an indication of adversity. One is reminded of the Sherlock Holmes story “Silver Blaze,” in which Dr. Watson asks where to look for a clue: “To the curious incident of the dog in the night-time,” says Holmes. “The dog did nothing in the night-time,” Watson answers. “That was the curious incident,” remarked Sherlock Holmes.13 A failure to signal a recovery might have an adverse impact on share price. In this context, a dividend—almost any dividend—might indicate to investors that the firm is prospering more or less according to plan. Astute students will observe that a subtler signaling problem occurs in the case: what kind of firm does Eastboro want to signal that it is? Case Exhibit 6 shows that CAD/CAM equipment and software companies pay low or no dividends, in contrast to electrical machinery manufacturers, who pay out one quarter to as much as 60 percent of their earnings. One can argue that, as a result of its restructuring, Eastboro is making a transition from the latter to the former. If so, the issue becomes how to tell investors. The article by Asquith and Mullins14 suggests that the most credible signal about corporate prospects is cash, in the form of either dividends or capital gains. Until the Artificial Workforce product line begins to deliver significant flows of cash, the share price is not likely to respond significantly. In addition, any decline in cash flow, caused by the risks listed earlier, would worsen the anticipated gain in share price. By implication, the Asquith-Mullins work would cast doubt on 12
These “turnaround” investors probably include the value-oriented institutional investors (13 percent of shares) and the short-term, trading-oriented individual investors (13 percent of shares). 13 From The Memoirs of Sherlock Holmes by Sir Arthur Conan Doyle. 14 Paul Asquith and David W. Mullins, Jr., “Signaling with Dividends, Stock Repurchases, and Equity Issues,” Financial Management (Autumn 1986): 27-44.
Case 24 Eastboro Machine Tools Corporation
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corporate image advertising: if cash dividends are what matters, then spending on advertising and a name change might be wasted. Stock prices and dividends
Some of the advocates of a high-dividend payout suggest that high stock prices are associated with high payouts. Students may attempt to prove this point by abstracting from the evidence in case Exhibits 6 and 7. As we know from academic research (e.g., Friend and Puckett),15 proving the relationship of stock prices to dividend payouts in a scientific way is extremely difficult. In simple terms, the reason is because price/earnings (P/E) ratios are probably associated with many factors that may be represented by dividend payout in a regression model. The most important of these factors is the firm’s investment strategy; Miller and Modigliani’s 16 dividend-irrelevance theorem makes the point that the firm’s investments—not the dividends it pays—determine stock prices. One can just as easily derive evidence of this assertion from case Exhibit 7. The sample of zero-payout companies has a higher average expected return on capital (13.6 percent) than the sample of high payout companies (average expected return of 10.9 percent); one may conclude that zero-payout companies have higher returns than high-payout companies and that investors would rather reinvest with zero-payout companies than receive a cash payout and be forced to redeploy the capital to lower-yielding investments.
Decision
The decision at hand is whether Eastboro should buy back stock or Discussion Question 1 and declare a dividend in the third quarter (although, for practical purposes, students Closing Vote will find themselves deciding for all of 2001). As the analysis so far suggests, the case draws students into a tug-of-war between financial considerations (which tend to reject dividends and buybacks, at least in the near term) and signaling considerations (which call for the resumption of dividends at some level, however small). Students will tend to cluster around three proposed policies: (1) zero payout, (2) low payout (1-10 percent), and (3) a residual payout scheme calling for dividends when cash is available. The arguments in favor of zero payout are: (1) the firm is making the transition into the CAD/CAM industry, where zero payout is the mode; (2) the company should not ignore the financial statements and act like a blue-chip firm—Eastboro’s risks are large enough without compounding them by disgorging cash; and (3) the signaling damage already occurred when the directors suspended the dividend in 2001.
15
Irwin Friend and M. Puckett, “Dividends and Stock Prices,” American Economic Review 54 (September 1964): 656-82. 16 Merton Miller and Franco Modigliani, “Dividend Policy, Growth, and the Valuation of Shares,” Journal of Business 34 (October 1961): 411-33.
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Case 24 Eastboro Machine Tools Corporation
The arguments in favor of a low payout are usually based on optimism about the firm’s prospects and on beliefs that Eastboro has sufficient debt capacity, that Eastboro is not exactly a CAD/CAM firm, and that any dividend that does not restrict growth will enhance share prices. Usually, the signaling argument is most significant for the proponents of this policy. The residual policy is a convenient alternative, although it resolves none of the thorny policy issues in this case. A residual dividend policy is bound to create significant signaling problems as the firm’s dividend waxes and wanes through each economic cycle. The question of the image advertising and corporate name change will entice the naive student as a relatively cheap solution to the signaling problem. The instructor should challenge such thinking. Signaling research suggests that effective signals are (1) unambiguous and (2) costly. The advertising and name change, costly as they may be, hardly qualify as unambiguous. On the other hand, seasoned investor relations professionals believe that advertising and name changes can be effective in alerting the capital markets to major corporate changes when integrated with other signaling devices such as dividends, capital structure, and investment announcements. The whole point of such campaigns should be to gain the attention of “lead steer” opinion leaders. Overall, inexperienced students tend to dismiss the signaling considerations in this case quite readily; senior executives and seasoned financial executives, on the other hand, view signaling quite seriously. If the class votes to buy back stock or declare no dividend in 2001, asking some of the students to dictate a letter to shareholders explaining the board’s decision may be useful: the difficult issues of credibility will emerge in a critique of this letter. If the class does vote to declare a dividend, the instructor can challenge the students to identify the operating policies they gambled on to make their decision. The underlying question: If adversity strikes, what will the class sacrifice first: debt, or dividend policies? Dividend policy is “puzzling,” to use Fisher Black’s term, largely because of its interaction with other corporate policies and its signaling effect.17 Decisions about the firm’s dividend policy may be the best way to illustrate the importance of managers’ judgments in corporate finance. However the class votes, one of the teaching points is that managers are paid to make difficult, even high-stakes policy choices on the basis of incomplete information and uncertain prospects.
17
Fisher Black, “The Dividend Puzzle,” Journal of Portfolio Management (Winter 1976): 5-8.
Case 24 Eastboro Machine Tools Corporation
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Exhibit TN1 EASTBORO MACHINE TOOLS CORPORATION
Supplemental Note: The Dividend Decision and Financing Policy The dividend decision is necessarily part of the financing policy of the firm. The dividend payout chosen may affect the creditworthiness of the firm and hence the costs of debt and equity; if the cost of capital changes, so may the value of the firm. Unfortunately, one cannot determine whether the change in value will be positive or negative without knowing more about the optimality of the firm’s debt policy. The link between debt and dividend policies has received little attention in academic circles, largely because of its complexity, but remains an important issue for chief financial officers and their advisors. The Eastboro case illustrates the impact of dividend payout on creditworthiness. Dividend payout has an unusual multiplier effect on financial reserves. The following table varies the total 2001-07 sources and uses of funds given in case Exhibit 8, according to different dividend-payout levels. Targeted Dividend Payout 0%
20%
Net Profit Less dividends Earnings retained New debt (stock buy-back) Depreciation Increase in assets
$
537.8 537.8 (119.3) 252.0 670.5
$
Initial debt (2000)
80.3
Change in debt
-
40%
$
537.8 107.6 430.2 (11.9) 252.0 670.3
537.8 215.1 322.7 95.5 252.0 670.2
80.3
80.3
-
Remarks
95.5
50%
$
537.8 268.9 268.9 149.2 252.0 670.1 80.3 Zero if (retained earnings + depreciation) >= increase in assets; otherwise the difference 149.2 etween (retained earnings + depreciation) and (increase in assets)
Ending debt (2007)
80.3
80.3
175.8
229.5
Initial equity (2000) Earnings retained
282.5 537.8
282.5 430.2
282.5 322.7
282.5 268.9
Stock buyback
(119.3)
Ending equity (2007)
701.0
700.9
Total capital
781.3
781.1
Debt/total capital Debt/equity Debt capacity (@.4=max debt/equity) Debt capacity used Unused debt capacity Ratio of debt capacity used to incremental payments to shareholders
(11.9)
10.3% 11.5%
Zero if (retained earnings + depreciation)
