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 ixPreface xiAcknowledgments xvPart One Foundations of Value1 Why Value Value? 32 Finance in a Nutshell 133 Fundamental Principles of Value Creation 234 Risk and the Opportunity Cost of Capital 495 The Alchemy of Stock Market Performance 636 The Stock Market and Economic Fundamentals 777 The Stock Market Is Smarter Than You Think 978 Return on Invested Capital 1179 Growth 147Part Two Core Valuation Techniques10 Frameworks for Valuation 17111 Reorganizing the Financial Statements 20112 Analyzing Performance 23513 Forecasting Performance 25514 Estimating Continuing Value 28315 Estimating the Cost of Capital 30316 Moving from Enterprise Value to Value per Share 33317 Analyzing the Results 35518 Using Multiples 36519 Valuation by Parts 385Part Three Advanced Valuation Techniques20 Taxes 40721 Nonoperating Items, Provisions, and Reserves 42322 Leases 43923 Retirement Obligations 45524 Measuring Performance in Capital-Light Businesses 46525 CFROI and Other Ways to Measure Return on Capital 48126 Inflation 49127 Cross-Border Valuation 511Part Four Managing for Value28 Corporate Portfolio Strategy 53129 Strategic Management: Analytics 55130 Strategic Management: Governance, Processes, and Decision Making 57331 Mergers and Acquisitions 58932 Divestitures 61733 Digital Initiatives and Companies 63334 Sustainability 65335 Capital Structure, Dividends, and Share Repurchases 67136 Investor Communications 703Part Five Special Situations37 Leveraged Buyouts 72938 Venture Capital 74939 High-Growth Companies 76340 Flexibility and Options 77941 Emerging Markets 81542 Cyclical Companies 83343 Banks 843Appendix A Discounted Economic Profit Equals Discounted Free Cash Flow 865Appendix B Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value 869Appendix C Levering and Unlevering the Cost of Equity 875Appendix D Leverage and the Price-to-Earnings Multiple 883Appendix E Other Capital Structure Issues 887Appendix F Technical Issues in Estimating the Market Risk Premium 891Appendix G Global, International, and Local CAPM 895Appendix H Two-Stage Formula for Continuing Value 903Appendix I A Valuation of Costco Wholesale 905Index 931

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 ixPreface xiAcknowledgments xvPart One Foundations of Value1 Why Value Value? 32 Finance in a Nutshell 133 Fundamental Principles of Value Creation 234 Risk and the Opportunity Cost of Capital 495 The Alchemy of Stock Market Performance 636 The Stock Market and Economic Fundamentals 777 The Stock Market Is Smarter Than You Think 978 Return on Invested Capital 1179 Growth 147Part Two Core Valuation Techniques10 Frameworks for Valuation 17111 Reorganizing the Financial Statements 20112 Analyzing Performance 23513 Forecasting Performance 25514 Estimating Continuing Value 28315 Estimating the Cost of Capital 30316 Moving from Enterprise Value to Value per Share 33317 Analyzing the Results 35518 Using Multiples 36519 Valuation by Parts 385Part Three Advanced Valuation Techniques20 Taxes 40721 Nonoperating Items, Provisions, and Reserves 42322 Leases 43923 Retirement Obligations 45524 Measuring Performance in Capital-Light Businesses 46525 CFROI and Other Ways to Measure Return on Capital 48126 Inflation 49127 Cross-Border Valuation 511Part Four Managing for Value28 Corporate Portfolio Strategy 53129 Strategic Management: Analytics 55130 Strategic Management: Governance, Processes, and Decision Making 57331 Mergers and Acquisitions 58932 Divestitures 61733 Digital Initiatives and Companies 63334 Sustainability 65335 Capital Structure, Dividends, and Share Repurchases 67136 Investor Communications 703Part Five Special Situations37 Leveraged Buyouts 72938 Venture Capital 74939 High-Growth Companies 76340 Flexibility and Options 77941 Emerging Markets 81542 Cyclical Companies 83343 Banks 843Appendix A Discounted Economic Profit Equals Discounted Free Cash Flow 865Appendix B Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value 869Appendix C Levering and Unlevering the Cost of Equity 875Appendix D Leverage and the Price-to-Earnings Multiple 883Appendix E Other Capital Structure Issues 887Appendix F Technical Issues in Estimating the Market Risk Premium 891Appendix G Global, International, and Local CAPM 895Appendix H Two-Stage Formula for Continuing Value 903Appendix I A Valuation of Costco Wholesale 905Index 931

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 ixPreface xiAcknowledgments xvPart One Foundations of Value1 Why Value Value? 32 Finance in a Nutshell 133 Fundamental Principles of Value Creation 234 Risk and the Opportunity Cost of Capital 495 The Alchemy of Stock Market Performance 636 The Stock Market and Economic Fundamentals 777 The Stock Market Is Smarter Than You Think 978 Return on Invested Capital 1179 Growth 147Part Two Core Valuation Techniques10 Frameworks for Valuation 17111 Reorganizing the Financial Statements 20112 Analyzing Performance 23513 Forecasting Performance 25514 Estimating Continuing Value 28315 Estimating the Cost of Capital 30316 Moving from Enterprise Value to Value per Share 33317 Analyzing the Results 35518 Using Multiples 36519 Valuation by Parts 385Part Three Advanced Valuation Techniques20 Taxes 40721 Nonoperating Items, Provisions, and Reserves 42322 Leases 43923 Retirement Obligations 45524 Measuring Performance in Capital-Light Businesses 46525 CFROI and Other Ways to Measure Return on Capital 48126 Inflation 49127 Cross-Border Valuation 511Part Four Managing for Value28 Corporate Portfolio Strategy 53129 Strategic Management: Analytics 55130 Strategic Management: Governance, Processes, and Decision Making 57331 Mergers and Acquisitions 58932 Divestitures 61733 Digital Initiatives and Companies 63334 Sustainability 65335 Capital Structure, Dividends, and Share Repurchases 67136 Investor Communications 703Part Five Special Situations37 Leveraged Buyouts 72938 Venture Capital 74939 High-Growth Companies 76340 Flexibility and Options 77941 Emerging Markets 81542 Cyclical Companies 83343 Banks 843Appendix A Discounted Economic Profit Equals Discounted Free Cash Flow 865Appendix B Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value 869Appendix C Levering and Unlevering the Cost of Equity 875Appendix D Leverage and the Price-to-Earnings Multiple 883Appendix E Other Capital Structure Issues 887Appendix F Technical Issues in Estimating the Market Risk Premium 891Appendix G Global, International, and Local CAPM 895Appendix H Two-Stage Formula for Continuing Value 903Appendix I A Valuation of Costco Wholesale 905Index 931