Corp Fin - Cost of Equity

[oktavian]

For a wholly equity-funded firm, what are the consequences of project return not meeting CoE?
- stock price will fall / unhappy investors that’s it? …problems funding future projects..?

 

[jutda]

I assume the same principle applies as for a firm that uses a mixed (debt and equity) capital structure and whose projects don’t meet the WACC threshold / the project’s return is below the IRR of the firm. The overall firm value decreases and hence the project shouldn’t be accepted and the share price would be likely to decrease. However, even though a project may have a negative NPV, it may be one worth taking if the option it provides the firm (to take other projects in the future) provides a more-than-compensating value.

 

[MrSmart]

It’s profitable, but destroying economic value.
In other words, shareholders would expect a return of CoE for a simillar project, so share price goes down.