Valuation

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.

• About the Authors ixPreface xiAcknowledgments xvPart One Foundations of Value1 Why Value Value? 32 Finance in a Nutshell 173 Fundamental Principles of Value Creation 274 Risk and the Cost of Capital 555 The Alchemy of Stock Market Performance 696 Valuation of ESG and Digital Initiatives 837 The Stock Market Is Smarter Than You Think 998 Return on Invested Capital 1279 Growth 155Part Two Core Valuation Techniques10 Frameworks for Valuation 17711 Reorganizing the Financial Statements 20512 Analyzing Performance 23913 Forecasting Performance 25914 Estimating Continuing Value 28515 Estimating the Cost of Capital 30516 Moving from Enterprise Value to Value per Share 33517 Analyzing the Results 35718 Using Multiples 36719 Valuation by Parts 391Part Three Advanced Valuation Techniques20 Taxes 41321 Nonoperating Items, Provisions, and Reserves 42722 Leases 44323 Retirement Obligations 45724 Measuring Performance in Capital-Light Businesses 46725 Alternative Ways to Measure Return on Capital 48326 Inflation 49327 Cross-Border Valuation 507Part Four Managing for Value28 Corporate Portfolio Strategy 52729 Strategic Management: Analytics 54730 Strategic Management: Mindsets and Behaviors 57131 Mergers and Acquisitions 58532 Divestitures 61333 Capital Structure, Dividends, and Share Repurchases 63334 Investor Communications 667Part Five Special Situations35 Emerging Markets 69136 High-Growth Companies 70937 Cyclical Companies 72538 Banks 73339 Flexibility 759Appendix A Discounted Economic Profit Equals Discounted Free Cash Flow 793Appendix B Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value 799Appendix C Levering and Unlevering the Cost of Equity 805Appendix D Leverage and the Price-to-Earnings Multiple 813Appendix E Other Capital Structure Issues 817Appendix F Technical Issues in Estimating the Market Risk Premium 823Appendix G Global, International, and Local CAPM 827Appendix H A Valuation of Costco Wholesale 835Appendix I Two-Stage Formula for Continuing Value 859Index 861