Suppose a company can reasonably determine that if it made $300 million in new investment, its earnings (perhaps before interest and taxes) would be about 5% higher, in the long-run, than if it didn't.[1] That basically means that the company's market cap (perhaps enterprise value) should be $6 billion[2] — independent of your cost of capital. If you're trading at $3 billion, that means your cost of capital is high, and in fact is higher than your marginal internal rate of return; if you have cash that you're looking to deploy, you should return it to shareholders, perhaps by buying back stock.[3] If you're trading at $10 billion, your cost of capital is lower than your marginal internal rate of return, and you should invest that $300 million internally, issuing new stock if necessary (and possible) to do so.
I've never been a CFO, and may be all wrong here, but the way schools present corporate finance the process is often sketched out as, well, you figure out your weighted average cost of capital, and your internal rate of return, and there are strategies for trying to do these things, but cost of equity in particular is pretty slippery. And it seems to me that it frequently doesn't matter; there's a simpler approach that avoids the questions that are hard, the answers to which largely cancel out by the time you get to the part that's actionable. So it seems to me that a lot of companies should often issue, somewhere in their quarterly or annual reports, ranges of what they think their "fair value" is, with the understanding that they're likely to buy below that range and sell above it. If they did, I'm sure some people would misunderstand and complain, not least because so many people seem to make those two things their primary hobbies; that his has, as a side-effect, some tendency to stabilize the stock price and to make money trading the company's own stock (if you hit both ends of the range in the same period) will probably be called "manipulation" or, I don't know, "profiteering" or something — the people I have in mind aren't careful about language. Some people might also imagine that the company is trying to tell stock traders that its price should stay in that range, which is not at all the point; certainly the company's buying and selling would not, in the face of big macroeconomic news, be expected to create hard price barriers. The range is an indication of internal rates of return of new investment, but in a non-traditional language; if shareholders decide the demand a higher rate of return than they'd been expecting, the price of the stock can go down and the company accepts that verdict.
[1] This is intended to be "in expectation", using a risk-neutral measure, but is still subject to supposing, for example, that you can reasonably estimate an expected glide-path that follows the otherwise expected glide-path, just some multiple higher. I mean, you don't need the glide-paths, which is part of the point of the post; you only need the multiple. And so I think that it's likely that there are a lot of environments in which a CFO could reasonably say that it's between 4% and 6%, in some reasonable expected sense, meaning, again, that it could end up outside that range, but that you can justify that reasonably well in the light of what should be reasonably known now.
[2] Or, continuing the previous footnote, maybe $5 billion or $7.5 billion.
[3] Ignoring other capital structure issues, which I think should be largely independent of this.
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