Chapter 11 - Sources of Long-Term Finance

Question 1

Equity finance

Answer 1

Equity finance refers to the finance
relating to the owners or equity shareholders of the company who jointly exercise ultimate control through their voting
rights. Equity finance is represented by the issued equity or ordinary share capital plus other components of equity (such
as share premium and retained earnings)
<br></br> – equity or ordinary shares
– retained earnings or internally generated funds

Question 2

Debt finance

Answer 2

Debt finance is the main alternative to equity that involves the payment of
interest. It can be used for both short-term and long-term purposes and may or may not be secured.
<br></br>– preference shares
– debentures (bonds or loan stocks)
– bank and institutional loans
– leasing
– securitisation of assets and use of special purpose vehicles
– private finance initiatives (PFIs)

**

Question 3

Advantages of equity shares (company perspective)

Answer 3

• Equity shareholders are paid the residual funds (in the form of dividends) or the leftover funds in the event of
  liquidation, after all other lenders and creditors are paid.
• From an investor’s liquidity point of view, equity shares of a quoted company can be easily traded in the stock
  market.
• A company which raises capital from issuing equity shares may provide a positive outlook for the company.
• It delivers greater confidence amongst investors and creditors.

Question 4

Disadvantages of equity shares (company perspective)

Answer 4

• In return for accepting the risk of ownership, equity shares carry voting rights through which equity shareholders
  jointly control the company.
• The equity shareholders have greater say in the management of the company, although managerial control may be
  limited.
• The issue of additional equity shares may be unfavourable to the existing shareholders, as it will dilute their existing
  voting rights.
• It may affect future dividends.

Question 5

4 main types of share issue (brief summaries to add)

Answer 5

• Public issue
• Rights issue
• Placing
• Scrip

Question 6

What are retained earnings?

Answer 6

Retained earnings are equity finance in the form of undistributed profits attributable to equity shareholders. The
proportion of the profits which is not distributed among the shareholders, but retained to be used in the growth of a
company, are reported as retained earnings.
Retained earnings are the most common and important source of finance, for both short-term and long-term purposes.
Use of retained earnings is also the most preferred method of financing over other sources of finance. However, retained
earnings are that element of profit not distributed, so they are not a cash amount. The cash generated in relation to these
profits may have been spent – on a capital project, for example – and yet the retained earnings figure would remain on
the statement of financial position.

Question 7

Advantages of retained earnings as a source of financing

Answer 7

• Since these are internally generated funds, they are the cheapest source of capital in that there are no issue costs.
  Companies save on expenses related to issuing shares or bonds such as marketing, publicity, printing and other
  administrative costs.
• The cash is immediately available (if it has not already been spent).
• There is no obligation on the part of the company to either pay interest or pay back the earnings.
• The management have more flexibility to decide how or where this money can be used.
• Retained earnings are part of equity. Therefore, the company is able to better face adverse conditions during
  depressions and economic downturns, thus building up its internally generated goodwill.
• Shareholders may also benefit from the use of retained earnings as they may be able to receive dividends out
  of them representing profits not distributed from previous years, even if the company does not earn enough
  profit for that year, provided that the company has sufficient cash to pay a dividend. Investors are also likely to
  view a company with sufficient retained earnings as favourable, thus appreciating its share value. The existing
  shareholders may profit from the rise in share prices.

Question 8

Disdvantages of retained earnings as a source of financing

Answer 8

• Internally generated funds may not be sufficient for financing purposes – especially in new companies that require a
  lot of investment.
• The investment requirements might not match the availability and the timing of the funds. A company runs the risk of
  missing company opportunities.
• If no suitable investments are available, shareholders’ money is being tied up in the company. This incurs an
  opportunity cost by having their money kept in the company. Large companies such as privatised utilities and
  demutualised building societies have made special dividend payments for this reason in the recent years.
• The excessive ‘ploughing back’ of profits or accumulated retained earnings may result in overcapitalisation.
• Excessive savings may be misused against the interest of the shareholders.
• The money is not made available to those in the company who can use it. Devoting too much profit to growth may
  starve the company of the cash it needs to fund ongoing operations.

Question 9

What factors should you consider when choosing between sources of finance?

Answer 9

1. Access to finance: the ability of a company to raise equity finance is dependent on its access to the investors.
   Quoted companies can issue both new shares and make rights issues. However, unquoted companies can only
   raise finance by rights issues and private placings due to its restricted access to public. There are also statutory
   restrictions: in the UK, only public limited companies may offer shares to the general public.
2. Control: Raising funds through internally-generated funds and rights issues results in no change to shareholder
   control. However, if diversification of control is desired, then an issue to the public will be preferred.
3. Amount of finance: the amount of finance that can be raised by a rights issue is limited and dependent on the
   amounts that can be raised from the existing shareholders. There is more flexibility for quoted companies for the
   amounts that can be raised from the general public that opens up the full financial resources of the market.
4. Cost of raising finance : flotations incur significant costs in management and administrative time and may not be
   a viable option for smaller companies. Use of internally generated funds is the cheapest and simplest method. For
   shares, public offers are the most expensive, following by placings and then by rights issues.
5. Pricing the issue: setting the price correctly is the most difficult area for all shares. For public issues, there is a
   danger of undersubscription if it is set too high, unlike a placing which is pre-agreed and negotiated to be attractive
   enough to the subscribing institutions. A rights issue bypasses the price problem since the shares are offered to
   existing shareholders. For unquoted companies, pricing is more complex as they cannot refer to no existing market
   prices.

Question 10

Types of preference share

Answer 10

Cumulative and non-cumulative
A cumulative preference share accrues or accumulates its annual fixed rate dividend in the following year if it cannot be
paid in any year. If dividends are not paid due to insufficient distributable profits (usually denoted by retained earnings),
the right to dividend for that year is carried forward to the next year and paid before any dividend is paid to equity shares.
In case of non-cumulative preference shares, the right to dividend for that year is lost.
Normally preference shares are considered cumulative unless specifically mentioned otherwise.<br></br>
Redeemable and irredeemable
Redeemable preference shares are those shares which can be purchased back (redeemed) by the company within
the lifetime of the company, subject to the terms of the issue. These shares can be redeemed at a future date and the
investment amount returned to the owner. Irredeemable preference shares are not redeemable or paid back except when
the company goes into liquidation.<br></br>
Participating and non-participating
Participating preference shares are entitled to a fixed rate of dividend and a share in surplus profits which remain after
dividend has been paid to equity shareholders. The surplus profits are distributed in a certain agreed ratio between the
participating preference shareholders and equity shareholders. Non-participating preference shares are entitled to only
the fixed rate of dividend.<br></br>
Convertible and non-convertible
The holder of convertible preference shares enjoys the right to convert the preference shares into equity shares at a
future date. This gives the investor the benefit of receiving a regular fixed dividend as well as an option to gain further
benefit by converting the preference shares to equity shares. The holder of non-convertible preference shares does not
enjoy this right.

Question 11

Advantages of preference shares

Answer 11

• Unlike fixed interest for debt financing, dividends are only payable if there are sufficient distributable profits available
  for the purpose.
• There is no loss of control, as preference shares do not carry voting rights.
• Unlike debt, dividends do not have to be paid if there are not enough profits. The right to dividend for that year is lost
  except for cumulative preference shares (the right to dividend is carried forward).
• Unlike debt, the shares are not secured on the company’s assets.

Question 12

Disadvantages of preference shares

Answer 12

• Unlike debt interest, dividends are not tax allowable. The use of preference shares is quite rare nowadays given the
  tax advantages of debt.
• Preference shares pay a higher rate of interest than debt because of the extra risk for shareholders.
• On liquidation of a company, preference shares rank before equity or ordinary shareholders.

Question 13

BONDS

Answer 13

A bond is a general term for various types of long-term loans to companies, including loan stock and debentures. Bonds
are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of
projects and activities. Owners of bonds are accounted for as creditors of the issuing company. They may issue bonds
directly to investors instead of obtaining loans from a bank. The company issues a bond with a fixed interest rate (coupon
rate) and the duration of the loan, which must be repaid at the maturity date. The issue price of a bond is typically
set at par, usually £100 ($1,000 in the US) face value per individual bond. The actual market price depends upon the
expected yield and the performance of the company compared to the market environment at the time.

Question 14

DEBENTURES

Answer 14

Debentures are the most common form of long-term loan used by large companies. A debenture is a written
acknowledgement of a debt, most commonly used by large companies to borrow money at a fixed rate of interest.
Debentures are written in a legal agreement or contract called ‘indenture’, which acknowledges the long-term debt raised
by a company. Debentures can be traded on a stock exchange, normally in units. They carry a fixed rate of interest
expressed as a percentage of nominal value. These loans are repayable on a fixed date and pay a fixed rate of interest.
A company makes these interest payments prior to paying out dividends to its shareholders.

Question 15

LOAN STOCKS

Answer 15

Loan stock refers to shares of common or preferred stock that are used as collateral to secure a loan from another party.
The loan is provided at a fixed interest rate, much like a standard loan and can be secured or unsecured. Loan stock is
valued higher if the company is publicly traded and unrestricted, since these loan stock shares can be easier to sell if
the borrower is unable to repay the loan. Lenders will have control of the shares’ loan stock until the borrower pays off
the loan. Once the loan term expires, the shares would be returned to the borrower, as they are no longer needed as
collateral.

Question 16

TYPES OF BONDS AND DEBENTURES

Answer 16

Secured and unsecured
Bonds or debentures are either unsecured or secured against collateral. Secured debts or debenture holders have
first charge on the assets that are used as security if the company goes into liquidation. A company with a fixed charge
debenture is restricted from selling the assets used as security until the loan is repaid in full. With a floating charge, it is
free to dispose of its assets in the ordinary course of business. Unsecured debentures are backed only by the reputation
and trust of the issuer.
Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the
repayment. Private and government institutions frequently issue this type of bond to secure capital. Some examples
of a government debentures would be government-issued Treasury bonds (T-bond) or Treasury bills (T-bill). They are
generally considered risk free because governments are assumed not to default on payments. Unsecured debentures do
not have this benefit and charge a higher rate of interest to compensate the risk.
Redeemable and irredeemable
Debentures can be either redeemable or irredeemable. Redeemable debentures are debentures which the company
has issued for a limited period of time. Debentures which are never repaid are irredeemable (also known as perpetual
debentures). They tend to be rare nowadays.
Redeemable debentures are usually repaid at their nominal value (at par) but may be issued as repayable at a premium
on nominal value. They are repayable at a fixed date (or during a fixed period) in the future.
Convertible and non-convertible
Convertible debentures or convertible loan stock have the option to convert into equity shares at a time and in a ratio
decided by the company when issued. Non-convertible debentures cannot be converted into equity shares.

Question 17

Advantages of bonds/debentures

Answer 17

• These loans are repayable on a fixed #date and pay a fixed rate of interest. The interest paid is usually less than the
  dividend paid to shareholders, as debentures are considered less risky than shares by investors.
• Debentures are advantageous to the issuer because they have a fixed repayment date.
• Unlike dividends, the interest paid is tax allowable, reducing the net cost to the company.
• Unlike shares, there are no restrictions contained in company law regarding the terms of issue of debentures.
• Debenture holders typically have no right to vote or have a voice in the management. They are preferred as a
  source of finance if any dilution of control is not desirable.

Question 18

Disadvantages of bonds/debentures

Answer 18

• Debenture holders are creditors of a company. Secured debenture holders have first charge on the assets that are
  used as security if the company goes into liquidation.
• Debenture holders receive interest payments regardless of the amount of profit or loss at the stipulated time. The
  interest payments are due prior to paying out dividends to shareholders.
• The risk for an investor of investing in debentures and other loans is less than the risk of investing in shares but
  there is still a risk of default. The higher the amount of debt finance, the higher the debt or gearing ratio. This may
  make the company more volatile and could lead to insolvency.

Question 19

BONDS WITH FIXED INTEREST (COUPON)

Answer 19

A company can issue bonds of a certain face value or par value (normally in multiples of £100) for a fixed amount of time
that promise to pay interest annually or semi-annually.
For example, a company could issue a 10-year bond with a coupon (interest) of 10% and par value of £100. This means
that the company will pay interest of £10 per annum for 10 years and will pay £100 at the end of 10 years to buy back the
bond from the lender.
The market price of such bonds depends upon the yield required or the rate of return expected by the investor. The
market value of the bond is determined by calculating the present value of the cash flows arising from the bond.

Question 20

DEEP DISCOUNT/ZERO COUPON BONDS

Answer 20

These are bonds or debentures issued at a large discount in comparison to their nominal or face value but are
redeemable at par on maturity.
The interest is either low (for deep discount bonds) or there is no interest (zero coupon bonds). Investors will receive a
large ‘bonus’ on maturity. Some investors may prefer zero coupon bonds because of the tax implications. As these bonds
do not pay any interest, investors may save on tax payments by holding the bond.
Growing companies can particularly benefit from these bonds because they pay low (or nil) interest during the life of the
bonds or debentures. The company could also possibly issue more conventional debentures to finance the redemption
when the time comes to redeem the original debentures.
For example, a company may issue straight 10% bonds with a face value of £100 and a maturity of five years. Interest of
10% (or £10) is payable each year. Zero coupon bonds are issued at a discount price in comparison with their face value
with 0% interest per year. Hence, the company would issue 0% bonds for less than a face value of £100 (say £80). The
earnings for the investor come from the difference between the payment price and the face value at which the bonds are
redeemed.
Deep discount bonds are issued at deep or significant discounts (say £70) against the face value of £100 and carry a low
rate of interest. On the maturity date, the issuer must pay the bondholder the face value of £100.

Question 21

EUROBONDs

Answer 21

A Eurobond is a bond issued for international investors. They are normally issued in a currency other than the home
currency. The term Eurobond only means that the bond was issued outside of its home country; it does not mean the
bond was issued in Europe or denominated in the Euro currency.
Commonly used Eurobonds are Eurodollar (issued in the dollar denominations) or Euroyen (issued in yen
denominations). Issuance is usually handled by an international financial institution on behalf of the borrower. Eurobonds
are popular as they offer issuers the ability to choose the country of issuance based on the regulatory market, interest
rates and activity of the market. They are also attractive to investors because they usually have low par values and
high liquidity.

Question 22

SHARE WARRANTS (OPTIONS)

Answer 22

Warrants are rights given to lenders allowing them to buy new shares in a company at a future date at a fixed, given
price.
Warrants are normally attached to a bond or a preference share to make it attractive for the investor by giving them the
potential to earn a profit in the future. The price at which they can buy the share in the future is called the exercise price.
If the current share price is less than the exercise price, the theoretical value of the warrant is zero, since the investor will
be better off buying the shares in the market. If the current share price is higher than the exercise price, then the warrant
holder has a potential to make a profit by getting the shares at a cheaper exercise price in the futurE.
<br></br>
Generally, if the company has good prospects, then the warrants will be quoted at the warrant conversion premium. This
is calculated by comparing the cost of purchasing a share using the warrant and the current share price.

Question 23

What is a (loan) covenant?

Answer 23

A covenant is a promise in any debt agreement that a company will remain within a determined range of financial measures and performance. Normally, covenants are added by lenders to protect their investment and minimise the risk of defaulting on payments by the company. Covenants are usually described in terms of financial ratios that must be maintained within a specific range of value.
<br></br>
Covenants can cover everything from dividend payments to an asset holding that must be maintained. If a covenant
is broken, the lender has the right to collect back the investment from the borrower. Covenants could be keeping or
maintaining a certain level of financial measures (affirmative covenants) or not going beyond or below a certain measure
(negative covenants).

Question 24

Advantages of leasing

Answer 24

• The biggest advantage of leasing is that cash outflow or payments related to leasing are spread out over several
  years, hence saving the burden of one-time significant cash payment to purchase an asset outright. This helps a
  business to maintain a steady cash flow profile.
• While leasing an asset, the ownership of the asset still lies with the lessor whereas the lessee just pays the rental
  expense. Given this agreement, it becomes plausible for a business to invest in good quality assets which might
  look unaffordable or expensive otherwise.
• Given that a company chooses to lease over investing in an asset by purchasing, it releases capital for the business
  to fund its other needs or to save money for a better capital investment decision.
• Leasing expense or lease payments are considered as operating expenses and are tax deductible.
• Lease expenses usually remain constant for over the asset’s life or lease tenure, or grow in line with inflation. This
  helps in planning expense or cash outflow when undertaking a budgeting exercise.
• For businesses operating in sectors where there is a high risk of technology becoming obsolete, leasing yields great
  returns and saves the business from the risk of investing in a technology that might soon become outdated. For
  example, it is ideal for the technology business.
• At the end of the leasing period, the lessee holds the right to buy the property and terminate the leasing contract,
  thus providing flexibility to business.

*

Question 25

Disadvantages of leasing

Answer 25

• At the end of the leasing period, the lessee does not become the owner of the asset despite paying a significant
  amount of money towards the asset over the years.
• The lessee remains responsible for the maintenance and proper operation of the asset being leased.
• Lease payments can become a burden in cases where the use of asset does not serve the requirement (usually
  after the passage of some years).
• If paying lease payments towards a land, the lessee cannot benefit from any appreciation in the value of the
  land. The long-term lease agreement also remains a burden on the business, as the agreement is locked and the
  expenses for several years are fixed.
• Although a lease does not appear on the statement of financial position of a company, investors still consider long-
  term lease as debt and adjust their valuation of a business to include leases.
• Given that investors treat long-term leases as debt, it might become difficult for a business to access capital markets
  and raise further loans or other forms of debt from the market.

Question 26

SECURITISATION

Answer 26

Securitisation is the financial practice of pooling together illiquid assets and repackaging them into an interest-bearing
security that can be traded (just like stocks and bonds) to raise more finance. This is commonly practised by financial
institutions (such as banks, mortgage companies and credit card companies) to reduce their risk on the illiquid assets
(such as mortgages and credit card cards) by selling or removing them from its statement of financial position.
Through securitisation, various cash flow generating assets (such as mortgages, bonds and loans) are pooled together
and their related cash flows are sold to investors as securities, which may be described as bonds, pass-through
securities, or collateralised debt obligations (CDOs). The pooled assets are essentially debt obligations that serve as
collateral. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed
by other types of receivables are asset-backed securities (ABS). Investors are repaid from the principal and interest cash
flows collected from the underlying debt

The securitisation market is extremely large – running in the multiple millions of pounds – and allows large investors such
as pension funds and hedge funds to buy these securities as a way of receiving a regular payment on their investments.
Securitisation offers investors a diversification of risks from a pool of assets. Special purpose vehicles (SPVs) usually
have excellent credit ratings. Investors get the benefit of the payment structure closely monitored by an independent
trustee and yields that are higher than those of similar debt instrument. Securitisation provides the flexibility to tailor the
instrument to meet the investor’s risk appetite.

However, there have been irregularities and misuse of SPVs in the recent past. Special purpose vehicles were misused
to mask crucial financial information from investors. Enron’s financial collapse in 2001 revealed that Enron used SPVs to
hide assets and debt from the public and investors.
The 2006 US subprime housing market crisis revealed that banks converted pools of risky mortgages into marketable
securities and sold too many of them to investors through the use of SPVs. The SPVs financed the purchase of the
assets by issuing bonds secured by the underlying mortgages. When home prices fell, it triggered defaults that led to the
collapse of the housing market in late 2006, followed by the banking crisis of 2007.

Question 27

SPECIAL PURPOSE VEHICLES

Answer 27

A special purpose vehicle (SPV), also referred to as special purpose entity (SPE), is a legal entity created for a specific
purpose. It provides a funding structure whereby the pooled assets are transferred to a SPV for legal and tax reasons.
The SPV then issues interest-bearing securities such as MBS, which are used to raise more finance. Normally a
company transfers assets to the SPV to finance a large project, thereby narrowing its goals without putting the entire firm
at risk. SPVs are commonly used to securitise loans and other receivables. Special purpose vehicles may be owned by
one or more entities and allow tax avoidance strategies unavailable in the home country.

Question 28

Advantages of securitisation

Answer 28

• Securitisation is an efficient way of raising large amounts of funding.
• Special purpose vehicles (SPVs) are entirely separate from the originating company. They allow off-balance sheet
  treatment of assets that are wiped off from the originator’s financial statements.
• Interest rates on securitised bonds are normally lower than those on corporate bonds.
• Private companies get access to wider capital markets – domestic and international.
• Shareholders can maintain undiluted ownership of the company.
• Intangible assets such as patents and copyrights can be used for security to raise cash.
• The assets in the SPV are protected, reducing the credit risk for investors and lowering the borrowing costs for
  issuers raising finance.
• An SPV usually has an excellent credit rating and low borrowing costs.

Question 29

Disadvantages of securitisation

Answer 29

• Securitisation can be a complicated and expensive way of raising long-term capital compared to traditional types of
  debt such as a bank loan.
• It may restrict the ability of the company to raise money in the future.
• There is a risk from loss of direct control of some of the company assets, potentially reducing the company’s value
  in the event of flotation.
• Transactions may not always lead to off-balance sheet treatment
• The company may incur substantial costs to close the SPV and reclaim the underlying assets.

Question 30

PRIVATE FINANCE INITIATIVES

Answer 30

Governments and public institutions require long-term finance to execute their projects. In order to share the risks and
rewards of such projects, the private finance initiative (PFI) was introduced in 1992 in the UK as a means of obtaining
private finance for public sector projects (such as the building of libraries, social housing, defence contracts, schools and
hospitals). In 1997, the PFI was moved within the organisation of the Public-Private Partnership (PPP) initiative, which
also has the objective of providing private sector funding for public projects.
A PFI is an important and controversial procurement method which uses private sector investment to provide funds
for major public sector capital investment. Private firms are contracted to complete, manage and handle the upfront
costs of public projects. Typically, a PFI contract is repaid by the government over a 30-year period. It places the risks
of buying and maintaining the asset with the private sector, while allowing the public sector to procure high-quality and
cost-effective public services while avoiding the need to raise taxes in the short term. The ultimate risk with a project,
however, lies with the public sector (government).
<br></br>

National Health Service (NHS) trusts in the UK use PFI for construction projects and to fund projects supporting
education and health services. These are funded out of future income that the projects help to generate. The Olympic
Delivery Authority that delivered the 2012 London Olympic Games is a good example of a PFI project.
However, PFI schemes are controversial due to the wasteful spending built into the public sector procurement
agreements that are part of PFI projects. There are many stories of flawed projects. Controversial projects include rising
car parking charges at many local hospitals, the M25 widening scheme that cost £1 billion more than forecast and the
kennels at the Defence Animal Centre, which cost more per night than rooms at the London Hilton. The cost of private
sector finance in the 2000s increased the overall debt cost of the UK government, indirectly costing taxpayers.

Question 31

Advantages of private finance initiatives

Answer 31

• The main advantage of PFI is that the public sector does not have to fund large capital outflows at the start of the
  project. It allows the public sector to procure high-quality and cost-effective public services whilst avoiding financing
  through higher borrowing and taxes.
• The public obtains valuable operational and management expertise and overall cost efficiencies from the private
  sector and vice versa. There is the opportunity for the development of new ideas and the transfer of skills in both
  sectors.
• The private sector takes on the risks of financing, constructing and then managing the project. It is expected that
  there would be higher value for money through PFI than through public sector financing. Extra investment can
  kickstart more projects, bringing economic and social benefits.
• PFI projects are nearly all fixed-price contracts in which the private sector is not paid until the asset has been
  delivered. PFI firms eventually pay tax, making the overall costs cheaper for the government.
• All PFI projects go through a bidding process, encouraging competition for design and quality of delivery.

Question 32

Disadvantages of private finance initiatives

Question 33

What is the government EFG scheme?

Answer 33

ENTERPISE FINANCE GUARANTEE
The EFG scheme is a loan guarantee scheme intended to facilitate additional bank lending to viable SMEs that have
been turned down for debt finance due to inadequate security or lack of a proven track record. The government will act
as a guarantor for the loan, thus providing assurance to the lending financial institutions against loss due to defaults.

Question 34

Advantages of government grants and assistance

Answer 34

• Government assistance is a cheap form of financial support.
• Interest rates on government loans are much lower than market rates.
• Unlike loans, most government grants don’t have to be repaid – they are essentially ‘free’ money.
• Information about grants is easily accessible through government websites and literature.
• Government-funded projects are normally beneficial to society and the public at large.

Question 35

Disadvantages of government grants and assistance

Answer 35

• Applications can be time consuming.
• They may require outcomes that are beneficial to society, sometimes at the expense of financial profit.
• There may be a long waiting period between applying for the grant or loan and approval.
• There may be lot of competition from other companies applying for the same grant or loan.
• There may be detailed requirements for eligibility.
• There are usually strict rules and conditions on how the money can be used.