About the Authors ix Preface xi Acknowledgments xv Part One Foundations of Value 1 Why Value Value? 3 2 Fundamental Principles of Value Creation 15 3 The Expectations Treadmill 43 4 Return on Invested Capital 57 5 Growth 79 Part Two Core Valuation Techniques 6 Frameworks for Valuation 101 7 Reorganizing the Financial Statements 131 8 Analyzing Performance and Competitive Position 163 9 Forecasting Performance 185 10 Estimating Continuing Value 211 11 Estimating the Cost of Capital 231 12 Moving from Enterprise Value to Value per Share 267 13 Calculating and Interpreting Results 287 14 Using Multiples to Triangulate Results 303 Part Three Intrinsic Value and the Stock Market 15 Market Value Tracks Return on Invested Capital and Growth 325 16 Markets Value Substance, Not Form 345 17 Emotions and Mispricing in the Market 369 18 Investors and Managers in Efficient Markets 385 Part Four Managing for Value 19 Corporate Portfolio Strategy 401 20 Performance Management 415 21 Mergers and Acquisitions 431 22 Creating Value through Divestitures 455 23 Capital Structure 475 24 Investor Communications 511 Part Five Advanced Valuation Issues 25 Taxes 529 26 Nonoperating Expenses, One-Time Charges, Reserves, and Provisions 543 27 Leases, Pensions, and Other Obligations 559 28 Capitalized Expenses 577 29 Inflation 587 30 Foreign Currency 601 31 Case Study: Heineken 615 Part Six Special Situations 32 Valuing Flexibility 657 33 Valuation in Emerging Markets 689 34 Valuing High-Growth Companies 717 35 Valuing Cyclical Companies 731 36 Valuing Banks 741 Appendix A Economic Profit and the Key Value Driver Formula 765 Appendix B Discounted Economic Profit Equals Discounted Free Cash Flow 769 Appendix C Derivation of Free Cash Flow,Weighted Average Cost of Capital, and Adjusted Present Value 773 Appendix D Levering and Unlevering the Cost of Equity 779 Appendix E Leverage and the Price-to-Earnings Multiple 787 Index 791
McKINSEY & COMPANY is a management consulting firm that helps leading corporations and organizations make distinctive, lasting, and substantial improvements in their performance. Over the past seven decades, the firm's primary objective has remained constant: to serve as an organization's most trusted external advisor on critical issues facing senior management. TIM KOLLER is a partner in McKinsey's New York office. Tim has served clients in North America and Europe on corporate strategy and issues concerning capital markets, M&A transactions, and value-based management. He leads the firm's research activities in valuation and capital markets issues. He received his MBA from the University of Chicago. MARC GOEDHART is an associate principal in McKinsey's Amsterdam office. Marc has served clients across Europe on portfolio restructuring, issues concerning capital markets, and M&A transactions. He received a PhD in finance from Erasmus University Rotterdam. DAVID WESSELS is an adjunct professor of finance and director of executive education at the Wharton School of the University of Pennsylvania. Named by BusinessWeek as one of America's top business school instructors, he teaches corporate valuation at the MBA and Executive MBA levels. David received his PhD from the University of California at Los Angeles.