Table of Contents

About the Authors ix


Preface xi


Acknowledgments xv


Part One Foundations of Value


1 Why Value Value? 3


2 Fundamental Principles of Value Creation 17


3 Conservation of Value and the Role of Risk 35


4 The Alchemy of Stock Market Performance 49


5 The Stock Market Is Smarter Than You Think 65


6 Return on Invested Capital 93


7 Growth 115


Part Two Core Valuation Techniques


8 Frameworks for Valuation 135


9 Reorganizing the Financial Statements 165


10 Analyzing Performance 201


11 Forecasting Performance 221


12 Estimating Continuing Value 247


13 Estimating the Cost of Capital 269


14 Moving from Enterprise Value to Value per Share 301


15 Analyzing the Results 321


16 Using Multiples 331


17 Valuation by Parts 353


Part Three Advanced Valuation Techniques


18 Taxes 373


19 Nonoperating Items, Provisions, and Reserves 387


20 Leases and Retirement Obligations 405


21 Alternative Ways to Measure Return on Capital 423


22 Inflation 445


23 Cross-Border Valuation 459


24 Case Study: Heineken 481


Part Four Managing for Value


25 Corporate Portfolio Strategy 525


26 Performance Management 543


27 Mergers and Acquisitions 565


28 Divestitures 593


29 Capital Structure, Dividends, and Share Repurchases 611


30 Investor Communications 643


Part Five Special Situations


31 Emerging Markets 667


32 Valuing High-Growth Companies 691


33 Cyclical Companies 705


34 Banks 713


35 Flexibility 741


Appendix A Discounted Economic Profit Equals Discounted Free Cash Flow 775


Appendix B Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value 781


Appendix C Levering and Unlevering the Cost of Equity 787


Appendix D Leverage and the Price-to-Earnings Multiple 795


Appendix E Other Capital Structure Issues 799


Appendix F Technical Issues in Estimating the Market Risk Premium 805


Index 809

About the Author

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 a senior expert 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.