Valuation Measuring and Managing the Value of Companies, University Edition

McKinsey & Company's bestselling guide to teaching corporate valuation - the fully updated seventh edition

Valuation: Measuring and Managing the Value of Companies, University Edition is filled with the expert guidance from McKinsey & Company that students and professors have come to rely on for over nearly three decades. Now in its seventh edition, this acclaimed volume continues to help financial professionals and students around the world gain a deep understanding of valuation and help their companies create, manage, and maximize economic value for their shareholders.

This latest edition has been carefully revised and updated throughout, and includes new insights on topics such as digital, ESG (environmental, social and governance), and long-term investing, as well as fresh case studies. For thirty years, Valuation has remained true to its basic principles and continues to offer a step-by-step approach to teaching valuation fundamentals, including:

• Analyzing historical performance
• Forecasting performance
• Estimating the cost of capital
• Interpreting the results of a valuation in context
• Linking a company's valuation multiples to core performance drivers

The University Edition contains end-of-chapter review questions to help students master key concepts from the book.

Wiley also offers an Online Instructor's Manual with a full suite of learning resources to complement valuation classroom instruction.

TIM KOLLER is a partner in McKinsey's Stamford, Connecticut office, where he leads a global team of corporate-finance expert consultants.

MARC GOEDHART is a senior expert in McKinsey's Amsterdam office and an 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.

About the Authors ix

Preface xi

Acknowledgments xv

Part One Foundations of Value

1 Why Value Value? 3

Review Questions 16

2 Finance in a Nutshell 17

Review Questions 26

3 Fundamental Principles of Value Creation 27

Review Questions 54

4 Risk and the Cost of Capital 55

Review Questions 68

5 The Alchemy of Stock Market Performance 69

Review Questions 83

6 Valuation of ESG and Digital Initiatives 85

Review Questions 100

7 The Stock Market is Smarter Than You Think 101

Review Questions 129

8 Return on Invested Capital 131

Review Questions 158

9 Growth 159

Review Questions 178

Part Two Core Valuation Techniques

10 Frameworks for Valuation 181

Review Questions 209

11 Reorganizing the Financial Statements 211

Review Questions 245

12 Analyzing Performance 247

Review Questions 267

13 Forecasting Performance 269

Review Questions 295

14 Estimating Continuing Value 299

Review Questions 318

15 Estimating the Cost of Capital 321

Review Questions 350

16 Moving from Enterprise Value to Value per Share 353

Review Questions 374

17 Analyzing the Results 377

Review Questions 387

18 Using Multiples 389

Review Questions 412

19 Valuation by Parts 415

Review Questions 434

Part Three Advanced Valuation Techniques

20 Taxes 439

Review Questions 453

21 Nonoperating Items, Provisions, and Reserves 455

Review Questions 471

22 Leases 473

Review Questions 486

23 Retirement Obligations 489

Review Questions 498

24 Measuring Performance in Capital-Light Businesses 499

Review Questions 514

25 Alternative Ways to Measure Return on Capital 515

Review Questions 524

26 Inflation 525

Review Questions 539

27 Cross-Border Valuation 541

Review Questions 559

Part Four Managing for Value

28 Corporate Portfolio Strategy 563

Review Questions 583

29 Strategic Management: Analytics 585

Review Questions 608

30 Strategic Management: Mindsets and Behaviors 609

Review Questions 623

31 Mergers and Acquisitions 625

Review Questions 653

32 Divestitures 655

Review Questions 674

33 Capital Structure, Dividends, and Share Repurchases 675

Review Questions 708

34 Investor Communications 709

Review Questions 731

Part Five Special Situations

35 Emerging Markets 735

Review Questions 752

36 High-Growth Companies 753

Review Questions 768

37 Cyclical Companies 769

Review Questions 777

38 Banks 779

Review Questions 805

39 Flexibility 807

Review Questions 841

Appendix A Discounted Economic Profit Equals Discounted Free Cash Flow 843

Appendix B Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value 849

Appendix C Levering and Unlevering the Cost of Equity 855

Appendix D Leverage and the Price-to-Earnings Multiple 863

Appendix E Other Capital Structure Issues 867

Appendix F Technical Issues in Estimating the Market Risk Premium 873

Appendix G Global, International, and Local CAPM 877

Appendix H A Valuation of Costco Wholesale 885

Appendix I Two-Stage Formula for Continuing Value 909

Index 911

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