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 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 Valuation of Costco Wholesale 835

Appendix I Two-Stage Formula for Continuing Value 859

Index 861