As notedearlier,virtuallyeveryfirm,atsomepointin the
future,willbecome astable-growthfirm,growingata rate
equalto orless thantheeconomyin whichitoperates. In
addition, growth creates value only if the return on
investments exceedsthecostofcapital.Clearly, thelonger
highgrowthand excessreturnslast,otherthingsremaining
equal,thegreaterthevalueofthefirm.Note,however,that
nofirmshouldbeabletoearnexcessreturnsforanylengthof
periodinacompetitiveproductmarket,sincecompetitorswill
be attracted by theexcess returns into thebusiness. Thus,
implicitintheassumptionthattherewillbehigh growthin
conjunctionwithexcessreturnsistheassumptionthatsome
barrierstoentryexistthatpreventnewfirmsfromentering
the market.
Giventhisrelationshipbetweenhowlongfirmscangrowat
above-averageratesandtheexistenceofbarrierstoentry,one
way firms can increase value is by augmenting existing
barrierstoentryandcomingupwithnewbarrierstoentry.
Another way of saying the same thing is to note that
companies that earn excess returns have significant
competitive advantages. Nurturing these advantages or
creating new ones can increase value.
Reduce the Cost of Financing
Thecost of capital fora firm wasdefined earlierto be a
compositecostofdebtandequityfinancing.Thecashflows
generatedovertimearediscountedbacktothepresentatthe
costofcapital.Holdingthecashflowsconstant,reducingthe
costofcapitalwillincreasethevalueofthefirm.Thereare
fourwaysinwhichafirmcanbringitscostofcapitaldown,