Valuation Workbook

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. MICHAEL CICHELLO is clinical professor in finance at the Smith School of Business at the University of Maryland and Academic Director of the Masters of Finance program. 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 xiIntroduction XIIIPart One Questions1 Why Value Value? 32 Finance in a Nutshell 53 Fundamental Principles of Value Creation 74 Risk and the Opportunity Cost of Capital 115 The Alchemy of Stock Market Performance 156 The Stock Market and Economic Fundamentals 197 The Stock Market Is Smarter than You Think 238 Return on Invested Capital 279 Growth 3110 Frameworks for Valuation 3511 Reorganizing the Financial Statements 3912 Analyzing Performance and Competitive Position 4313 Forecasting Performance 4714 Estimating Continuing Value 5315 Estimating the Cost of Capital 5716 Moving from Enterprise Value to Value per Share 6117 Analyzing the Results 6518 Using Multiples 6919 Valuation by Parts 7320 Taxes 7721 Nonoperating Items, Provisions, and Reserves 7922 Leases 8323 Retirement Obligations 8724 Measuring Performance in Capital-Light Businesses 8925 CFROI and Other Ways to Measure Return on Capital 9326 Inflation 9527 Cross-Border Valuation 9928 Corporate Portfolio Strategy 10329 Strategic Management: Analytics 10730 Strategic Management: Governance, Processes, and Decision-Making 11131 Mergers and Acquisitions 11532 Divestitures 11933 Digital Initiatives and Companies 12334 Sustainability 12535 Capital Structure, Dividends, and Share Repurchases 12736 Investor Communications 13137 Leveraged Buyouts 13538 Venture Capital 13939 High-Growth Companies 14140 Flexibility and Options 14341 Emerging Markets 14742 Cyclical Companies 14943 Banks 153Part Two Solutions1 Why Value Value? 1592 Finance in a Nutshell 1613 Fundamental Principles of Value Creation 1634 Risk and the Opportunity Cost of Capital 1655 The Alchemy of Stock Market Performance 1676 The Stock Market and Economic Fundamentals 1697 The Stock Market Is Smarter than You Think 1718 Return on Invested Capital 1739 Growth 17510 Frameworks for Valuation 17711 Reorganizing the Financial Statements 17912 Analyzing Performance and Competitive Position 18113 Forecasting Performance 18314 Estimating Continuing Value 18715 Estimating the Cost of Capital 19116 Moving from Enterprise Value to Value per Share 19317 Analyzing the Results 19518 Using Multiples 19719 Valuation by Parts 19920 Taxes 20121 Nonoperating Items, Provisions, and Reserves 20322 Leases 20523 Retirement Obligations 20724 Measuring Performance in Capital-Light Businesses 20925 CFROI and Other Ways to Measure Return on Capital 21126 Inflation 21327 Cross-Border Valuation 21728 Corporate Portfolio Strategy 22129 Strategic Management: Analytics 22330 Strategic Management: Governance, Processes, and Decision-Making 22531 Mergers and Acquisitions 22732 Divestitures 22933 Digital Initiatives and Companies 23134 Sustainability 23335 Capital Structure, Dividends, and Share Repurchases 23536 Investor Communications 23737 Leveraged Buyouts 24138 Venture Capital 24339 High-Growth Companies 24540 Flexibility and Options 24741 Emerging Markets 24942 Cyclical Companies 25143 Banks 253Index 255