Answer to Question #20690 in Economics of Enterprise for mesfin

Question

A new competitor enters the market.

Answer 1

Firm value is a measure of a company's value, often used as an alternative to straightforward market capitalization. It is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. When new competitor enters the market, three factors of firm value are under the influence: a) company's growth (delivering to as many customers as possible through differentiation from competitors), if new competitor presents various range of products and services with lower prices and better quality, company will have problems with its value; b) profitability (achieve this without burning money); c) capital utilization through efficient operations. Investors prefer to put money into profitable and successful business, so they will assess the company's situation and in case of low company's firm value they will invest into it. The competitor will have to look for other options.