Valuation

About the Authors ix Preface xi Acknowledgments xv Part One Foundations of Value 1 Why Value Value? 3 2 Finance in a Nutshell 17 3 Fundamental Principles of Value Creation 27 4 Risk and the Cost of Capital 55 5 The Alchemy of Stock Market Performance 69 6 Valuation of ESG and Digital Initiatives 83 7 The Stock Market is Smarter Than You Think 99 8 Return on Invested Capital 127 9 Growth 155 Part Two Core Valuation Techniques 10 Frameworks for Valuation 177 11 Reorganizing the Financial Statements 205 12 Analyzing Performance 239 13 Forecasting Performance 259 14 Estimating Continuing Value 285 15 Estimating the Cost of Capital 305 16 Moving from Enterprise Value to Value per Share 335 17 Analyzing the Results 357 18 Using Multiples 367 19 Valuation by Parts 391 Part Three Advanced Valuation Techniques 20 Taxes 413 21 Nonoperating Items, Provisions, and Reserves 427 22 Leases 443 23 Retirement Obligations 457 24 Measuring Performance in Capital-Light Businesses 467 25 Alternative Ways to Measure Return on Capital 483 26 Inflation 493 27 Cross-Border Valuation 507 Part Four Managing for Value 28 Corporate Portfolio Strategy 527 29 Strategic Management: Analytics 547 30 Strategic Management: Mindsets and Behaviors 571 31 Mergers and Acquisitions 585 32 Divestitures 613 33 Capital Structure, Dividends, and Share Repurchases 633 34 Investor Communications 667 Part Five Special Situations 35 Emerging Markets 691 36 High-Growth Companies 709 37 Cyclical Companies 725 38 Banks 733 39 Flexibility 759 Appendix A Discounted Economic Profit Equals Discounted Free Cash Flow 793 Appendix B Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value 799 Appendix C Levering and Unlevering the Cost of Equity 805 Appendix D Leverage and the Price-to-Earnings Multiple 813 Appendix E Other Capital Structure Issues 817 Appendix F Technical Issues in Estimating the Market Risk Premium 823 Appendix G Global, International, and Local CAPM 827 Appendix H A

TIM KOLLER is a partner in McKinsey's Stamford, Connecticut office, where he leads a global team of corporate-finance expert consultants. Tim has served clients globally on corporate strategy and capital markets, mergers and acquisitions transactions, and strategic planning and resource allocation.

MARC GOEDHART is a senior expert in McKinsey's Amsterdam office and endowed professor of corporate valuation at Rotterdam School of Management, Erasmus University (RSM).

DAVID WESSELS is an adjunct professor of finance at the Wharton School of the University of Pennsylvania. He was named by Bloomberg Businessweek as one of America's top business school instructors.

MCKINSEY & COMPANY is a global management-consulting firm that serves leading global organizations across a wide range of industries and functions, helping them create change that matters.