Valuation: Measuring and Managing the Value of Companies, University Edition

TIM KOLLER is a McKinsey partner and founder of McKinsey's Strategy and Corporate Finance Insights team. In his 40 years of consulting, he has served clients globally on corporate strategy and capital markets, acquisitions and divestitures, and resource allocation. MARC GOEDHART is a senior expert in McKinsey's Strategy and Corporate Finance practice and an endowed professor of corporate valuation at Rotterdam School of Management (RSM), Erasmus University. 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. McKinsey combines bold strategies and transformative technologies to help organizations innovate and achieve lasting gains in performance.

About the Authors ix Preface xi Acknowledgments xv Part One Foundations of Value 1 Why Value Value? 3 Review Questions 13 2 Finance in a Nutshell 15 Review Questions 24 3 Fundamental Principles of Value Creation 25 Review Questions 51 4 Risk and the Opportunity Cost of Capital 53 Review Questions 67 5 The Alchemy of Stock Market Performance 69 Review Questions 83 6 The Stock Market and Economic Fundamentals 85 Review Questions 104 7 The Stock Market Is Smarter Than You Think 105 Review Questions 124 8 Return on Invested Capital 127 Review Questions 157 9 Growth 159 Review Questions 180 Part Two Core Valuation Techniques 10 Frameworks for Valuation 183 Review Questions 212 11 Reorganizing the Financial Statements 215 Review Questions 249 12 Analyzing Performance 251 Review Questions 270 13 Forecasting Performance 273 Review Questions 300 14 Estimating Continuing Value 303 Review Questions 323 15 Estimating the Cost of Capital 325 Review Questions 355 16 Moving from Enterprise Value to Value per Share 357 Review Questions 378 17 Analyzing the Results 381 Review Questions 391 18 Using Multiples 393 Review Questions 413 19 Valuation by Parts 415 Review Questions 434 Part Three Advanced Valuation Techniques 20 Taxes 439 Review Questions 454 21 Nonoperating Items, Provisions, and Reserves 457 Review Questions 472 22 Leases 473 Review Questions 488 23 Retirement Obligations 491 Review Questions 501 24 Measuring Performance in Capital-Light Businesses 503 Review Questions 518 25 CFROI and Other Ways to Measure Return on Capital 519 Review Questions 529 26 Inflation 531 Review Questions 550 27 Cross-Border Valuation 551 Review Questions 569 Part Four Managing for Value 28 Corporate Portfolio Strategy 573 Review Questions 593 29 Strategic Management: Analytics 595 Review Questions 616 30 Strategic Management: Governance, Processes, and Decision Making 617 Review Questions 633 31 Mergers and Acquisitions 635 Review Questions 663 32 Divestitures 665 Review Questions 681 33 Digital Initiatives and Companies 683 Review Questions 702 34 Sustainability 703 Review Questions 720 35 Capital Structure, Dividends, and Share Repurchases 721 Review Questions 752 36 Investor Communications 753 Review Questions 777 Part Five Special Situations 37 Leveraged Buyouts 781 Review Questions 800 38 Venture Capital 801 Review Questions 815 39 High-Growth Companies 817 Review Questions 832 40 Flexibility and Options 833 Review Questions 868 41 Emerging Markets 869 Review Questions 887 42 Cyclical Companies 889 Review Questions 898 43 Banks 899 Review Questions 920 Appendix A Discounted Economic Profit Equals Discounted Free Cash Flow 921 Appendix B Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value 925 Appendix C Levering and Unlevering the Cost of Equity 931 Appendix D Leverage and the Price-to-Earnings Multiple 939 Appendix E Other Capital Structure Issues 943 Appendix F Technical Issues in Estimating the Market Risk Premium 947 Appendix G Global, International, and Local CAPM 951 Appendix H Two-Stage Formula for Continuing Value 959 Appendix I A Valuation of Costco Wholesale 961 Index 987