Valuation, 7th Edition

Valuation, 7th Edition

by McKinsey & Company Inc., Tim Koller, Marc Goedhart, David Wessels
Released June 2020
Publisher(s): Wiley
ISBN: 9781119610885

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Book description

McKinsey & Company's #1 best-selling guide to corporate valuation—the fully updated seventh edition

Valuation has been the foremost resource for measuring company value for nearly three decades. Now in its seventh edition, this acclaimed volume continues to help financial professionals 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.  

Clear, accessible chapters cover the fundamental principles of value creation, analyzing and forecasting performance, capital structure and dividends, valuing high-growth companies, and much more. The Financial Times calls the book “one of the practitioners’ best guides to valuation.” 

This book: 

  • Provides complete, detailed guidance on every crucial aspect of corporate valuation
  • Explains the strategies, techniques, and nuances of valuation every manager needs to know
  • Covers both core and advanced valuation techniques and management strategies
  • Features/Includes a companion website that covers key issues in valuation, including videos, discussions of trending topics, and real-world valuation examples from the capital markets

For over 90 years, McKinsey & Company has helped corporations and organizations make substantial and lasting improvements in their performance. Through seven editions and 30 years, Valuation: Measuring and Managing the Value of Companies, has served as the definitive reference for finance professionals, including investment bankers, financial analysts, CFOs and corporate managers, venture capitalists, and students and instructors in all areas of finance.

Table of contents

  1. Cover
  2. About the Authors
  3. Preface
  4. Acknowledgments
  5. Part One Foundations of Value
    1. Chapter 1 Why Value Value?
      1. What Does It Mean to Create Shareholder Value?
      2. Short-Termism Runs Deep
      3. Shareholder Capitalism Cannot Solve Every Challenge
      4. Can Stakeholder Interests Be Reconciled?
      5. Consequences of Forgetting Value-Creation Principles
      6. This Book
      7. Notes
    2. Chapter 2 Finance in a Nutshell
      1. The Early Years
      2. A New Concept
      3. Should Lily and Nate Try to Maximize ROIC?
      4. Going Public
      5. Expansion into Related Formats
      6. Some Lessons
      7. Notes
    3. Chapter 3 Fundamental Principles of Value Creation
      1. The Relationship of Growth, ROIC, and Cash Flow
      2. Balancing ROIC and Growth to Create Value
      3. Some Examples
      4. Implications for Managers
      5. Economic Profit Combines ROIC and Size
      6. Conservation of Value
      7. The Math of Value Creation
      8. Summary
      9. Notes
    4. Chapter 4 Risk and the Cost of Capital
      1. Cost of Capital Is an Opportunity Cost
      2. Companies Have Little Control over Their Cost of Capital
      3. Create Better Forecasts, Not Ad Hoc Risk Premiums
      4. Decide How Much Cash Flow Risk to Take On
      5. Decide Which Types of Risk to Hedge
      6. Summary
      7. Notes
    5. Chapter 5 The Alchemy of Stock Market Performance
      1. Why Shareholder Expectations Become a Treadmill
      2. The Treadmill’s Real-World Effects
      3. Decomposing TSR
      4. Understanding Expectations
      5. Implications for Managers
      6. Notes
    6. Chapter 6 Valuation of ESG and Digital Initiatives
      1. A Common Framework
      2. Environmental, Social, and Governance (ESG) Concerns
      3. Digital Initiatives
      4. Closing Thoughts
      5. Notes
    7. Chapter 7 The Stock Market Is Smarter Than You Think
      1. Markets and Fundamentals: A Model
      2. Markets and Fundamentals: The Evidence
      3. Myths about Earnings
      4. Myths about Earnings Management
      5. Myths about Diversification
      6. Myths about Company Size
      7. Myths about Market Mechanics
      8. Myths about Value Distribution
      9. Summary
      10. Notes
    8. Chapter 8 Return on Invested Capital
      1. What Drives ROIC?
      2. Competitive Advantage
      3. Sustaining Return on Invested Capital
      4. An Empirical Analysis of Returns on Invested Capital
      5. Summary
      6. Notes
    9. Chapter 9 Growth
      1. Drivers of Revenue Growth
      2. Growth and Value Creation
      3. Why Sustaining Growth Is Hard
      4. Empirical Analysis of Corporate Growth
      5. Summary
      6. Notes
  6. Part Two Core Valuation Techniques
    1. Chapter 10 Frameworks for Valuation
      1. Enterprise Discounted Cash Flow Model
      2. Economic Profit-Based Valuation Models
      3. Adjusted-Present-Value Model
      4. Capital Cash Flow Model
      5. Cash-Flow-to-Equity Valuation Model
      6. Problematic Modifications to Discounted Cash Flow
      7. Alternatives to Discounted Cash Flow
      8. Summary
      9. Notes
    2. Chapter 11 Reorganizing the Financial Statements
      1. Reorganizing the Accounting Statements: Key Concepts
      2. Reorganizing the Accounting Statements: In Practice
      3. Advanced Issues
      4. Notes
    3. Chapter 12 Analyzing Performance
      1. Analyzing Returns on Invested Capital
      2. Analyzing Revenue Growth
      3. Credit Health and Capital Structure
      4. General Considerations
      5. Notes
    4. Chapter 13 Forecasting Performance
      1. Determine the Forecast’s Length and Detail
      2. Components of a Good Model
      3. Mechanics of Forecasting
      4. Advanced Forecasting
      5. Concluding Thoughts
      6. Notes
    5. Chapter 14 Estimating Continuing Value
      1. Recommended Formula for DCF Valuation
      2. Continuing Value Using Economic Profit
      3. Misunderstandings about Continuing Value
      4. Common Pitfalls
      5. Other Approaches to Continuing Value
      6. Closing Thoughts
      7. Notes
    6. Chapter 15 Estimating the Cost of Capital
      1. Calculating the Weighted Average Cost of Capital
      2. Estimating the Cost of Equity
      3. Estimating the After-Tax Cost of Debt
      4. Forecasting Target Capital Structure to Weight WACC Components
      5. Estimating WACC for Complex Capital Structures
      6. Closing Thoughts
      7. Notes
    7. Chapter 16 Moving from Enterprise Value to Value per Share
      1. The Valuation Buildup Process
      2. Valuing Nonoperating Assets
      3. Valuing Interest-Bearing Debt
      4. Valuing Debt Equivalents
      5. Valuing Hybrid Securities and Noncontrolling Interests
      6. Estimating Value per Share
      7. Notes
    8. Chapter 17 Analyzing the Results
      1. Validating the Model
      2. Sensitivity Analysis
      3. Creating Scenarios
      4. The Art of Valuation
      5. Notes
    9. Chapter 18 Using Multiples
      1. Value Multibusiness Companies as a Sum of Their Parts
      2. Use Forward Earnings Estimates
      3. Use Net Enterprise Value Divided by Adjusted EBITA or NOPAT
      4. Adjust for Nonoperating Items
      5. Use the Right Peer Group
      6. Alternative Multiples
      7. Summary
      8. Notes
    10. Chapter 19 Valuation by Parts
      1. The Mechanics of Valuing by Parts
      2. Building Business Unit Financial Statements
      3. Cost of Capital
      4. Testing the Value Based on Multiples of Peers
      5. Summary
      6. Notes
  7. Part Three Advanced Valuation Techniques
    1. Chapter 20 Taxes
      1. Estimating Operating Taxes
      2. Converting Operating Taxes to Operating Cash Taxes
      3. Deferred Taxes on the Reorganized Balance Sheet
      4. Valuing Deferred Taxes
      5. Closing Thoughts
      6. Notes
    2. Chapter 21 Nonoperating Items, Provisions, and Reserves
      1. Nonoperating Expenses and One-Time Charges
      2. Provisions and Their Corresponding Reserves
      3. Closing Thoughts
      4. Notes
    3. Chapter 22 Leases
      1. Accounting for Operating Leases
      2. Valuing a Company with Operating Leases
      3. Adjusting Historical Financial Statements for Operating Leases
      4. An Alternative Method for Valuing Operating Leases
      5. Closing Thoughts
      6. Notes
    4. Chapter 23 Retirement Obligations
      1. Reorganizing the Financial Statements with Pensions
      2. Pensions and the Cost of Capital
      3. Relevering Beta to Estimate the Cost of Equity
      4. Incorporating Pensions into the Value of Equity
      5. Closing Thoughts
      6. Notes
    5. Chapter 24 Measuring Performance in Capital-Light Businesses
      1. Capitalizing Expensed Investments
      2. When Businesses Need Little or No Capital
      3. Summary
      4. Notes
    6. Chapter 25 Alternative Ways to Measure Return on Capital
      1. When ROIC Equals IRR
      2. When CFROI Equals IRR
      3. Choosing between ROIC and CFROI
      4. Flaws of Other Cash Returns on Capital
      5. Summary
      6. Notes
    7. Chapter 26 Inflation
      1. Inflation Leads to Lower Value Creation
      2. Historical Analysis in Times of High Inflation
      3. Financial Projections in Real and Nominal Terms
      4. Summary
      5. Notes
    8. Chapter 27 Cross-Border Valuation
      1. Forecasting Cash Flows
      2. Estimating the Cost of Capital
      3. Applying a Domestic- or Foreign-Capital WACC
      4. Incorporating Foreign-Currency Risk in the Valuation
      5. Using Translated Foreign-Currency Financial Statements
      6. Summary
      7. Notes
  8. Part Four Managing for Value
    1. Chapter 28 Corporate Portfolio Strategy
      1. Bet on the Horse—or the Jockey?
      2. What Makes an Owner the Best?
      3. The Best-Owner Life Cycle
      4. Dynamic Portfolio Management
      5. The Myth of Diversification
      6. Constructing the Portfolio
      7. Summary
      8. Notes
    2. Chapter 29 Strategic Management: Analytics
      1. Adopting a Granular Perspective
      2. Taking the Enterprise View
      3. Applying Value Drivers to Monitor Performance
      4. Setting Targets
      5. Monitoring Results
      6. Summary
      7. Notes
    3. Chapter 30 Strategic Management: Mindsets and Behaviors
      1. Strong Governance
      2. Debiased Decision Making
      3. Synchronized and Streamlined Processes
      4. Closing Thoughts
      5. Notes
    4. Chapter 31 Mergers and Acquisitions
      1. A Framework for Value Creation
      2. Empirical Results
      3. Archetypes for Value-Creating Acquisitions
      4. Longer-Odds Strategies for Creating Value from Acquisitions
      5. Estimating Operating Improvements
      6. How to Pay: With Cash or Stock?
      7. Focus on Value Creation, Not Accounting
      8. Characteristics of Better Acquirers
      9. Closing Thoughts
      10. Notes
    5. Chapter 32 Divestitures
      1. Value Creation from Divestitures
      2. Why Executives Shy Away from Divestitures
      3. Assessing Potential Value from Divestitures
      4. Deciding on Transaction Type
      5. Summary
      6. Notes
    6. Chapter 33 Capital Structure, Dividends, and Share Repurchases
      1. Practical Guidelines
      2. A Four-Step Approach
      3. Setting a Target Capital Structure
      4. Payouts to Shareholders
      5. Equity Financing
      6. Debt Financing
      7. Divestitures of Noncore Businesses
      8. Creating Value from Financial Engineering
      9. Summary
      10. Notes
    7. Chapter 34 Investor Communications
      1. Objectives of Investor Communications
      2. Intrinsic Value vs. Market Value
      3. Which Investors Matter?
      4. Communicating with Intrinsic Investors
      5. Listening to Investors
      6. Earnings Guidance
      7. Meeting Consensus Earnings Forecasts
      8. Summary
      9. Notes
  9. Part Five Special Situations
    1. Chapter 35 Emerging Markets
      1. Why Scenario DCF Is More Accurate than Risk Premiums
      2. Applying the Scenario DCF Approach
      3. Estimating Cost of Capital in Emerging Markets
      4. Other Complications in Valuing Emerging-Markets Companies
      5. Triangulating Valuation
      6. Summary
      7. Notes
    2. Chapter 36 High-Growth Companies
      1. A Valuation Process for High-Growth Companies
      2. Uncertainty Is Here to Stay
      3. Summary
      4. Notes
    3. Chapter 37 Cyclical Companies
      1. Share Price Behavior
      2. An Approach to Valuing Cyclical Companies
      3. Implications for Managing Cyclical Companies
      4. Summary
      5. Notes
    4. Chapter 38 Banks
      1. Economics of Banking
      2. Principles of Bank Valuation
      3. Complications in Bank Valuations
      4. Summary
      5. Notes
    5. Chapter 39 Flexibility
      1. A Hierarchy of Approaches
      2. Uncertainty, Flexibility, and Value
      3. Managing Flexibility
      4. Methods for Valuing Flexibility
      5. Four Steps to Valuing Flexibility
      6. Real-Option Valuation and Decision Tree Analysis: A Numerical Example
      7. Summary
      8. Notes
  10. Appendix A Discounted Economic Profit Equals Discounted Free Cash Flow
    1. Proof Using Perpetuities
    2. Generalized Proof
    3. Notes
  11. Appendix B Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value
    1. Enterprise Discounted Cash Flow
    2. Adjusted Present Value
    3. Notes
  12. Appendix C Levering and Unlevering the Cost of Equity
    1. Unlevered Cost of Equity
    2. Levered Cost of Equity
    3. Levered Beta
    4. Unlevered Beta and Pensions
  13. Appendix D Leverage and the Price-to-Earnings Multiple
    1. Step 1: Defining Unlevered P/E
    2. Step 2: Linking Net Income to NOPAT
    3. Step 3: Deriving Levered P/E
  14. Appendix E Other Capital Structure Issues
    1. Pecking-Order Theory
    2. Market-Based Rating Approach
    3. Leverage, Coverage, and Solvency
    4. Notes
  15. Appendix F Technical Issues in Estimating the Market Risk Premium
    1. Calculate Premium Relative to Long-Term Government Bonds
    2. Use the Longest Period Possible
    3. Use an Arithmetic Average of Longer-Dated (e.g., Ten-Year) Intervals
    4. Notes
  16. Appendix G Global, International, and Local CAPM
    1. Global CAPM
    2. International CAPM
    3. Local CAPM
    4. Notes
  17. Appendix H A Valuation of Costco Wholesale
    1. Modeling the Financial Statements
    2. Reorganizing the Financial Statements
    3. Forecasting the Financials
    4. Estimating Continuing Value
    5. Estimating the Weighted Average Cost of Capital
    6. Valuing the Enterprise and Converting to Equity
    7. Putting the Model to Work
    8. Note
  18. Appendix I Two-Stage Formula for Continuing Value
    1. Note
  19. Index
  20. End User License Agreement

Product information

  • Title: Valuation, 7th Edition
  • Author(s): McKinsey & Company Inc., Tim Koller, Marc Goedhart, David Wessels
  • Release date: June 2020
  • Publisher(s): Wiley
  • ISBN: 9781119610885