This study investigates the effects of shareholders’ real options on (1) firm financial performance and (2) estimations of the implied cost of equity. After measuring the equity value of steady-state operations using the residual income model, and the abandonment and expansion options using the Black-Scholes option pricing model, I find that firms with a large expansion (abandonment) option value experience better (worse) financial performance than those with a small such value. I also find that ignoring the expansion (abandonment) option results in a downward bias in implied cost of equity estimates by an average of 1.23 percentage points.