Dilution of Value: Book versus Market Values
A stock’s market value will fall if the NPV of the project being financed is negative and rise if the NPV is
positive. Whenever a stock’s book value is greater than its market value, selling new stock will result in
accounting dilution (but not necessarily result in market value dilution)
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• Permits a corporation to register a large issue with the SEC and sell it in small portions over a two-year period
• Reduces the flotation costs of registration
• Allows the company more flexibility to raise money quickly
• Requirements
▪ Company must be rated investment grade.
▪ Cannot have defaulted on debt within last three years
▪ Market value of stock must be greater than $150 million.
▪ No violations of the Securities Act of 1934 in the last three years
Shelf Registration
Shelf registration – SEC Rule 415 allows a company to register all securities that it expects to issue
within the next two years in one registration statement. The firm can then issue the securities in smaller
increments, as funds are needed during the two-year period. Both debt and equity can be registered using
Rule 415.
Qualifications:
-Securities must be investment grade
-No debt defaults in the last three years
-Market value of stock must be greater than $150 million
-No violations of the Securities Act of 1934 within the last three years