Valuation: Measuring and Managing the Value of Companies, University Edition E-Book

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance
• Sprache: Englisch

Seitenzahl: 1669

Veröffentlichungsjahr: 2025

Beschreibung

The #1 best-selling guide to business valuation, newly updated and revised

Valuation, University Edition, Eighth Edition: Measuring and Managing the Value of Companies is filled with the expert guidance from McKinsey & Company that students and professors have come to rely on for more than 30 years. Now in it’s eighth edition, this volume continues to help professors and students around the world gain a deep understanding of valuation and help their companies create, manage, and maximize economic value for their shareholders.

Called “the best practitioners' guide to valuation” by The Financial Times and “one of the most influential contemporary books about the world economy” by The Economist, the newly revised eighth McKinsey's long tradition of excellence. In the book, a team of veteran McKinsey & Company professionals walk you through the foundations of valuation, advanced topics like valuing high-growth companies and digital assets, and managerial topics such as corporate portfolio strategy and acquisitions. You'll also discover:

• Questions at the end of each chapter for use in class discussions, assignments, and more with access to a curriculum and test bank
• Best practices to apply valuation to business strategy questions and communicate with investors
• How to analyze and forecast performance, the cost of capital, and put it all together in a coherent valuation

The University Edition contains end-of-chapter review questions to help students master key concepts from the book. Professors

McKinsey & Company has been helping businesses, governments, non-profit organizations and other institutions grow and thrive for almost 100 years . Valuation's authors draw on that storied history to bring you the most relevant, accurate, intuitive, and practical guide to valuation on the market today.

Leseprobe

Table of Contents

COVER

TABLE OF CONTENTS

TITLE PAGE

COPYRIGHT

ABOUT THE AUTHORS

PREFACE

WHY THIS BOOK

STRUCTURE OF THE BOOK

VALUATION SPREADSHEET

ACKNOWLEDGMENTS

PART ONE: FOUNDATIONS OF VALUE

CHAPTER 1: WHY VALUE VALUE?

WHAT IT MEANS TO CREATE VALUE FOR SHAREHOLDERS

SHORT-TERMISM RUNS DEEP

THE STAKEHOLDER CONUNDRUM

CONSEQUENCES OF FORGETTING VALUE CREATION PRINCIPLES

THIS BOOK

REVIEW QUESTIONS

CHAPTER 2: FINANCE IN A NUTSHELL

THE EARLY YEARS

A NEW CONCEPT

SHOULD LILY AND NATE TRY TO MAXIMIZE ROIC?

GOING PUBLIC

EXPANSION INTO RELATED FORMATS

SOME LESSONS

REVIEW QUESTIONS

CHAPTER 3: FUNDAMENTAL PRINCIPLES OF VALUE CREATION

THE RELATIONSHIP OF GROWTH, ROIC, AND CASH FLOW

BALANCING ROIC AND GROWTH TO CREATE VALUE

SOME EXAMPLES

IMPLICATIONS FOR MANAGERS

ECONOMIC PROFIT COMBINES ROIC AND SIZE

CONSERVATION OF VALUE

THE MATH OF VALUE CREATION

SUMMARY

REVIEW QUESTIONS

CHAPTER 4: RISK AND THE OPPORTUNITY COST OF CAPITAL

COST OF CAPITAL IS AN OPPORTUNITY COST

COMPANIES HAVE LITTLE CONTROL OVER THEIR COST OF CAPITAL

CREATE BETTER FORECASTS, NOT AD HOC RISK PREMIUMS

DECIDE HOW MUCH CASH FLOW RISK TO TAKE ON

DECIDE WHICH TYPES OF RISK TO HEDGE

SUMMARY

REVIEW QUESTIONS

CHAPTER 5: THE ALCHEMY OF STOCK MARKET PERFORMANCE

WHY SHAREHOLDER EXPECTATIONS BECOME A TREADMILL

THE TREADMILL’S REAL-WORLD EFFECTS

DECOMPOSING TSR

UNDERSTANDING EXPECTATIONS

IMPLICATIONS FOR MANAGERS

REVIEW QUESTIONS

CHAPTER 6: THE STOCK MARKET AND ECONOMIC FUNDAMENTALS

MARKETS AND FUNDAMENTALS: A MODEL

MARKETS AND FUNDAMENTALS: THE EVIDENCE

BUBBLES IN THE STOCK MARKET

SUMMARY

REVIEW QUESTIONS

CHAPTER 7: THE STOCK MARKET IS SMARTER THAN YOU THINK

MYTHS ABOUT EARNINGS

MYTHS ABOUT EARNINGS MANAGEMENT

MYTHS ABOUT DIVERSIFICATION

MYTHS ABOUT COMPANY SIZE

MYTHS ABOUT MARKET MECHANICS

MYTHS ABOUT VALUE DISTRIBUTION

SUMMARY

REVIEW QUESTIONS

CHAPTER 8: RETURN ON INVESTED CAPITAL

WHAT DRIVES ROIC?

COMPETITIVE ADVANTAGE

SUSTAINING RETURN ON INVESTED CAPITAL

AN EMPIRICAL ANALYSIS OF RETURNS ON INVESTED CAPITAL

SUMMARY

REVIEW QUESTIONS

CHAPTER 9: GROWTH

DRIVERS OF REVENUE GROWTH

GROWTH AND VALUE CREATION

WHY SUSTAINING GROWTH IS HARD

EMPIRICAL ANALYSIS OF CORPORATE GROWTH

SUMMARY

REVIEW QUESTIONS

PART TWO: CORE VALUATION TECHNIQUES

CHAPTER 10: FRAMEWORKS FOR VALUATION

ENTERPRISE DISCOUNTED CASH FLOW MODEL

ECONOMIC-PROFIT-BASED VALUATION MODELS

ADJUSTED-PRESENT-VALUE MODEL

CAPITAL CASH FLOW MODEL

CASH-FLOW-TO-EQUITY VALUATION MODEL

PROBLEMATIC MODIFICATIONS TO DISCOUNTED CASH FLOW

ALTERNATIVES TO DISCOUNTED CASH FLOW

SUMMARY

REVIEW QUESTIONS

CHAPTER 11: REORGANIZING THE FINANCIAL STATEMENTS

REORGANIZING THE FINANCIAL STATEMENTS: KEY CONCEPTS

REORGANIZING THE FINANCIAL STATEMENTS: IN PRACTICE

ADVANCED ISSUES

REVIEW QUESTIONS

CHAPTER 12: ANALYZING PERFORMANCE

ANALYZING RETURNS ON INVESTED CAPITAL

ANALYZING REVENUE GROWTH

CREDIT HEALTH AND CAPITAL STRUCTURE

BENCHMARKING VALUATION

CLOSING THOUGHTS

REVIEW QUESTIONS

CHAPTER 13: FORECASTING PERFORMANCE

DETERMINE THE FORECAST’S LENGTH AND DETAIL

COMPONENTS OF A GOOD MODEL

MECHANICS OF FORECASTING

ADVANCED FORECASTING

CONCLUDING THOUGHTS

REVIEW QUESTIONS

CHAPTER 14: ESTIMATING CONTINUING VALUE

RECOMMENDED FORMULA FOR DCF VALUATION

CONTINUING VALUE USING ECONOMIC PROFIT

MISUNDERSTANDINGS ABOUT CONTINUING VALUE

COMMON PITFALLS

OTHER APPROACHES TO CONTINUING VALUE

CLOSING THOUGHTS

REVIEW QUESTIONS

CHAPTER 15: ESTIMATING THE COST OF CAPITAL

CALCULATING THE WEIGHTED AVERAGE COST OF CAPITAL

ESTIMATING THE COST OF EQUITY

ESTIMATING THE AFTER-TAX COST OF DEBT

ESTIMATING TARGET CAPITAL STRUCTURE

ESTIMATING WACC FOR COMPLEX CAPITAL STRUCTURES

CLOSING THOUGHTS

REVIEW QUESTIONS

CHAPTER 16: MOVING FROM ENTERPRISE VALUE TO VALUE PER SHARE

THE VALUATION BUILDUP PROCESS

VALUING NONOPERATING ASSETS

VALUING DEBT EQUIVALENTS

VALUING HYBRID SECURITIES AND NONCONTROLLING INTERESTS

ESTIMATING VALUE PER SHARE

REVIEW QUESTIONS

CHAPTER 17: ANALYZING THE RESULTS

VALIDATING THE MODEL

SENSITIVITY ANALYSIS

CREATING SCENARIOS

THE ART OF VALUATION

REVIEW QUESTIONS

CHAPTER 18: USING MULTIPLES

VALUE MULTIBUSINESS COMPANIES AS A SUM OF THEIR PARTS

USE FORWARD EARNINGS ESTIMATES

USE NET ENTERPRISE VALUE DIVIDED BY ADJUSTED EBITA OR NOPAT

ADJUST FOR NONOPERATING ITEMS

USE THE RIGHT PEER GROUP

ALTERNATIVE MULTIPLES

SUMMARY

REVIEW QUESTIONS

CHAPTER 19: VALUATION BY PARTS

THE MECHANICS OF VALUING BY PARTS

BUILDING BUSINESS UNIT FINANCIAL STATEMENTS

COST OF CAPITAL

TESTING THE VALUE BASED ON MULTIPLES OF PEERS

SUMMARY

REVIEW QUESTIONS

PART THREE: ADVANCED VALUATION TECHNIQUES

CHAPTER 20: TAXES

ESTIMATING OPERATING TAXES

CONVERTING OPERATING TAXES TO OPERATING CASH TAXES

DEFERRED TAXES ON THE REORGANIZED BALANCE SHEET

VALUING DEFERRED TAXES

CLOSING THOUGHTS

REVIEW QUESTIONS

CHAPTER 21: NONOPERATING ITEMS, PROVISIONS, AND RESERVES

NONOPERATING EXPENSES AND ONE-TIME CHARGES

PROVISIONS AND THEIR CORRESPONDING RESERVES

CLOSING THOUGHTS

REVIEW QUESTIONS

CHAPTER 22: LEASES

ACCOUNTING FOR OPERATING LEASES

VALUING A COMPANY WITH OPERATING LEASES

ADJUSTING FOR LEASES IN PRACTICE

AN ALTERNATIVE METHOD FOR VALUING OPERATING LEASES

CLOSING THOUGHTS

REVIEW QUESTIONS

CHAPTER 23: RETIREMENT OBLIGATIONS

REORGANIZING THE FINANCIAL STATEMENTS WITH PENSIONS

INCORPORATING PENSIONS INTO THE VALUE OF EQUITY

CLOSING THOUGHTS

REVIEW QUESTIONS

CHAPTER 24: MEASURING PERFORMANCE IN CAPITAL-LIGHT BUSINESSES

CAPITALIZING EXPENSED INVESTMENTS

WHEN BUSINESSES NEED LITTLE OR NO CAPITAL

SUMMARY

REVIEW QUESTIONS

CHAPTER 25: CFROI AND OTHER WAYS TO MEASURE RETURN ON CAPITAL

WHEN ROIC EQUALS IRR

WHEN CFROI EQUALS IRR

CHOOSING BETWEEN ROIC AND CFROI

FLAWS OF OTHER CASH RETURNS ON CAPITAL

SUMMARY

REVIEW QUESTIONS

CHAPTER 26: INFLATION

INFLATION LEADS TO LOWER VALUE CREATION

HISTORICAL ANALYSIS IN TIMES OF HIGH INFLATION

FINANCIAL PROJECTIONS IN REAL AND NOMINAL TERMS

SUMMARY

REVIEW QUESTIONS

CHAPTER 27: CROSS-BORDER VALUATION

FORECASTING CASH FLOWS

ESTIMATING THE COST OF CAPITAL

APPLYING A DOMESTIC- OR FOREIGN-CAPITAL WACC

INCORPORATING FOREIGN-CURRENCY RISK IN THE VALUATION

USING TRANSLATED FOREIGN-CURRENCY FINANCIAL STATEMENTS

SUMMARY

REVIEW QUESTIONS

PART FOUR: MANAGING FOR VALUE

CHAPTER 28: CORPORATE PORTFOLIO STRATEGY

CORPORATE PORTFOLIO: MARKET ATTRACTIVENESS AND BETTER OWNER

MARKET ATTRACTIVENESS

WHAT MAKES A BETTER OWNER?

THE BETTER-OWNER LIFE CYCLE

DYNAMIC PORTFOLIO MANAGEMENT

CONSTRUCTING THE PORTFOLIO: AN EXAMPLE

THE MYTH OF DIVERSIFICATION

PRACTICAL CONSIDERATIONS

SUMMARY

REVIEW QUESTIONS

CHAPTER 29: STRATEGIC MANAGEMENT: ANALYTICS

CONDUCT A FINANCIAL ANALYSIS FOR EVERY INITIATIVE

RANK THE ENTERPRISE’S TOP STRATEGIC INITIATIVES

ALLOCATE RESOURCES ACROSS UNITS AT A GRANULAR LEVEL

APPLYING VALUE DRIVERS TO MANAGE PERFORMANCE

SUMMARY

REVIEW QUESTIONS

CHAPTER 30: STRATEGIC MANAGEMENT: GOVERNANCE, PROCESSES, AND DECISION MAKING

STRONG GOVERNANCE

SYNCHRONIZED AND STREAMLINED PROCESSES

UNBIASED DECISION MAKING

CLOSING THOUGHTS

REVIEW QUESTIONS

CHAPTER 31: MERGERS AND ACQUISITIONS

A FRAMEWORK FOR VALUE CREATION

EMPIRICAL RESULTS

M&A BLUEPRINT

ARCHETYPES FOR VALUE-CREATING ACQUISITIONS

LONGER-ODDS STRATEGIES FOR CREATING VALUE FROM ACQUISITIONS

ESTIMATING OPERATING IMPROVEMENTS

HOW TO PAY: WITH CASH OR STOCK?

FOCUS ON VALUE CREATION, NOT ACCOUNTING

CLOSING THOUGHTS

REVIEW QUESTIONS

CHAPTER 32: DIVESTITURES

HOW DIVESTITURES CREATE VALUE

THE COST OF HOLDING ON

EXECUTIVES SHY AWAY FROM DIVESTITURES

DECIDING ON TRANSACTION TYPE

EVIDENCE ON VALUE CREATION FROM DIVESTITURES

SUMMARY

REVIEW QUESTIONS

CHAPTER 33: DIGITAL INITIATIVES AND COMPANIES

DIGITAL PERFORMANCE INITIATIVES

DIGITAL BUSINESSES

ANALYTICAL TOOLS FOR DIGITAL BUSINESS VALUATION

CLOSING THOUGHTS

REVIEW QUESTIONS

CHAPTER 34: SUSTAINABILITY

PITFALLS IN VALUING SUSTAINABILITY STRATEGY

A SYSTEMATIC FRAMEWORK TO ASSESS VALUE FROM SUSTAINABILITY

COMPETITIVE ADVANTAGE STILL MATTERS

SUSTAINABILITY RATINGS

SUMMARY

REVIEW QUESTIONS

CHAPTER 35: CAPITAL STRUCTURE, DIVIDENDS, AND SHARE REPURCHASES

PRACTICAL GUIDELINES

A FOUR-STEP APPROACH

SETTING A TARGET CAPITAL STRUCTURE

PAYOUTS TO SHAREHOLDERS

EQUITY FINANCING

DEBT FINANCING

DIVESTITURES OF NONCORE BUSINESSES

CREATING VALUE FROM FINANCIAL ENGINEERING

SUMMARY

REVIEW QUESTIONS

CHAPTER 36: INVESTOR COMMUNICATIONS

OBJECTIVES OF INVESTOR COMMUNICATIONS

INTRINSIC VALUE VERSUS MARKET VALUE

WHICH INVESTORS MATTER?

COMMUNICATING WITH INTRINSIC INVESTORS

LISTENING TO INVESTORS

EARNINGS GUIDANCE

MEETING CONSENSUS EARNINGS FORECASTS

SUMMARY

REVIEW QUESTIONS

PART FIVE: SPECIAL SITUATIONS

CHAPTER 37: LEVERAGED BUYOUTS

PROPOSED LBO OF AXELEDGE PARTS COMPANY

MECHANICS OF DEBT FINANCING

MODELING THE FINANCIAL STATEMENTS

ESTIMATING CASH FLOW TO EQUITY

MEASURING RETURNS IN AN LBO TRANSACTION

THE COMPONENTS OF VALUE IN AN LBO TRANSACTION

CONCLUDING THOUGHTS

REVIEW QUESTIONS

CHAPTER 38: VENTURE CAPITAL

POST-MONEY VALUATION AND THE VC SWEET SPOT

VC VALUATION METHOD

ADVANCED ISSUES IN VENTURE-BACKED VALUATION

SUMMARY

REVIEW QUESTIONS

CHAPTER 39: HIGH-GROWTH COMPANIES

A VALUATION PROCESS FOR HIGH-GROWTH COMPANIES

UNCERTAINTY IS HERE TO STAY

CONCLUDING THOUGHTS

REVIEW QUESTIONS

CHAPTER 40: FLEXIBILITY AND OPTIONS

A HIERARCHY OF APPROACHES

UNCERTAINTY, FLEXIBILITY, AND VALUE

MANAGING FLEXIBILITY

METHODS FOR VALUING FLEXIBILITY

FOUR STEPS TO VALUING FLEXIBILITY

REAL-OPTION VALUATION AND DECISION TREE ANALYSIS: A NUMERICAL EXAMPLE

SUMMARY

REVIEW QUESTIONS

CHAPTER 41: EMERGING MARKETS

COUNTRY RISK IS DIVERSIFIABLE

APPLYING THE SCENARIO DCF APPROACH

WHY THE COUNTRY RISK PREMIUM APPROACH IS NOT ADEQUATE

ESTIMATING COST OF CAPITAL IN EMERGING MARKETS

OTHER COMPLICATIONS IN VALUING EMERGING-MARKETS COMPANIES

TRIANGULATING VALUATION

SUMMARY

REVIEW QUESTIONS

CHAPTER 42: CYCLICAL COMPANIES

SHARE PRICE BEHAVIOR

AN APPROACH TO VALUING CYCLICAL COMPANIES

IMPLICATIONS FOR MANAGING CYCLICAL COMPANIES

SUMMARY

REVIEW QUESTIONS

CHAPTER 43: BANKS

ECONOMICS OF BANKING

BANK BALANCE SHEETS

PRINCIPLES OF BANK VALUATION

COMPLICATIONS IN BANK VALUATIONS

SUMMARY

REVIEW QUESTIONS

APPENDIX A: DISCOUNTED ECONOMIC PROFIT EQUALS DISCOUNTED FREE CASH FLOW

PROOF USING PERPETUITIES

GENERALIZED PROOF

APPENDIX B: DERIVATION OF FREE CASH FLOW, WEIGHTED AVERAGE COST OF CAPITAL, AND ADJUSTED PRESENT VALUE

ENTERPRISE DISCOUNTED CASH FLOW

ADJUSTED PRESENT VALUE

APPENDIX C: LEVERING AND UNLEVERING THE COST OF EQUITY

UNLEVERED COST OF EQUITY

LEVERED COST OF EQUITY

LEVERED BETA

UNLEVERED BETA AND PENSIONS

APPENDIX D: LEVERAGE AND THE PRICE-TO-EARNINGS MULTIPLE

STEP 1: DEFINING UNLEVERED P/E

STEP 2: LINKING NET INCOME TO NOPAT

STEP 3: DERIVING LEVERED P/E

APPENDIX E: OTHER CAPITAL STRUCTURE ISSUES

PECKING-ORDER THEORY

MARKET-BASED RATING APPROACH

LEVERAGE, COVERAGE, AND SOLVENCY

APPENDIX F: TECHNICAL ISSUES IN ESTIMATING THE MARKET RISK PREMIUM

CALCULATE PREMIUM RELATIVE TO LONG-TERM GOVERNMENT BONDS

USE THE LONGEST PERIOD POSSIBLE

USE AN ARITHMETIC AVERAGE OF MULTIYEAR RETURNS

APPENDIX G: GLOBAL, INTERNATIONAL, AND LOCAL CAPM

GLOBAL CAPM

INTERNATIONAL CAPM

LOCAL CAPM

APPENDIX H: TWO-STAGE FORMULA FOR CONTINUING VALUE

APPENDIX I: A VALUATION OF COSTCO WHOLESALE

MODELING THE FINANCIAL STATEMENTS

REORGANIZING THE FINANCIAL STATEMENTS

FORECASTING THE FINANCIAL STATEMENTS

ESTIMATING CONTINUING VALUE

ESTIMATING THE WEIGHTED AVERAGE COST OF CAPITAL

VALUING THE ENTERPRISE AND ESTIMATING VALUE PER SHARE

PUTTING THE MODEL TO WORK

INDEX

END USER LICENSE AGREEMENT

List of Illustrations

Chapter 1

EXHIBIT 1.1 Companies Creating More Shareholder Value Create More Jobs

EXHIBIT 1.2 Increasing Percentage of American Households Owning Stocks

Chapter 2

EXHIBIT 2.1 Expected Profit Growth at Logan’s Stores Outpacing Lily’s Dresses

EXHIBIT 2.2 Lily’s Dresses Outperforming in Return on Invested Capital (ROIC) an...

EXHIBIT 2.3 Expansion’s Impact on ROIC and Cash Flow

EXHIBIT 2.4 Economic Profit Is Higher with Lower-Performing Stores in the Mix

EXHIBIT 2.5 Identical Results from DCF and Economic-Profit Valuation

Chapter 3

EXHIBIT 3.1 Growth and ROIC Drive Value

EXHIBIT 3.2 Tale of Two Companies: Same Earnings, Different Cash Flows

EXHIBIT 3.3 Value Inc.: DCF Valuation

EXHIBIT 3.4 Translating Growth and ROIC into Cash Flow Available for Distributio...

EXHIBIT 3.5 Value Inc.: Lower Initial Cash Flow at Higher Growth Rate

EXHIBIT 3.6 Translating Growth and ROIC into Value

EXHIBIT 3.7 Increasing Value: Impact of Higher Growth and ROIC

EXHIBIT 3.8 Value Creation by Type of Growth

EXHIBIT 3.9 Impact of Growth and ROIC on High- and Low-ROIC Companies

EXHIBIT 3.10 Impact on Value of Improving Margin vs. Capital Productivity

Chapter 4

EXHIBIT 4.1 Volatility of Portfolio Return Declines with Diversification

EXHIBIT 4.2 Scenario Approach to Incorporating Nondiversifiable Risk

EXHIBIT 4.3 Example of Equivalent Risk Premiums for Different Probability Levels...

EXHIBIT 4.4 Aggregating Projects Reduces Risk While Achieving High Expected Retuns

Chapter 5

EXHIBIT 5.1 Walmart vs. Ulta Beauty: Growth, Return on Invested Capital (ROIC), ...

EXHIBIT 5.2 TSR Driven by Revenue Growth, Margin, ROIC, and Changes in Expectations

EXHIBIT 5.3 Traditional vs. Enhanced TSR Decomposition

EXHIBIT 5.4 Earnings Yield: TSR with Zero Growth

EXHIBIT 5.5 Enhancing TSR Decomposition to Uncover Effects of Leverage

EXHIBIT 5.6 Walmart vs. Ulta Beauty: TSR Decomposition, 2018–2023

Chapter 6

EXHIBIT 6.1 Model of Share Price Trading Boundaries

EXHIBIT 6.2 Distribution of Growth Rates and ROIC for Growth and Value Stocks

EXHIBIT 6.3 Stock Performance Against Bonds in the Long Run, 1801–2023

EXHIBIT 6.4 Economic Fundamentals Explain Long-Term Total Shareholder Returns

EXHIBIT 6.5 Estimating Fundamental Market Valuation Levels

EXHIBIT 6.6 U.S. Equity Markets: Seven Eras

EXHIBIT 6.7 Market Value vs. ROIC and Growth: Selected Industry Sectors

EXHIBIT 6.8 Market Value, ROIC, and Growth: Empirical Relationship Across Companies

EXHIBIT 6.9 Diverging Returns in U.S. and European Equity Markets

EXHIBIT 6.10 Economic Profit Growth and Market Capitalization: U.S. and European ...

EXHIBIT 6.11 Impact of Largest Stocks on Overall Market Valuation

Chapter 7

EXHIBIT 7.1 Relationship Between Share Repurchases and Shareholder Returns

EXHIBIT 7.2 No Market Reaction to Announcement of Goodwill Impairment

EXHIBIT 7.3 Earnings Growth of Least Volatile Companies: Not So Smooth

EXHIBIT 7.4 Effects of Inclusion and Exclusion Disappear

EXHIBIT 7.5 Delisting from U.S./UK Exchanges: No Value Impact on Companies from ...

EXHIBIT 7.6 U.S. Cross-Listing: No Impact on Valuation of Developed-Market Compa...

EXHIBIT 7.7 Cumulative Average Abnormal Returns Around Stock Splits

Chapter 8

EXHIBIT 8.1 Company Profitability: Industry Matters

EXHIBIT 8.2 Sources of Competitive Advantage

EXHIBIT 8.3 Network Effects Boosting ROIC

EXHIBIT 8.4 ROIC of U.S.-Based Nonfinancial Companies, 1963–2023

EXHIBIT 8.5 ROIC of Europe-Based Nonfinancial Companies, 1995–2023

EXHIBIT 8.6 Distribution of ROIC

EXHIBIT 8.7 Disaggregating ROIC of U.S.-Based Nonfinancial Companies, 1995–2023

EXHIBIT 8.8 Contribution of Life Sciences and Technology Industries to the Broad...

EXHIBIT 8.9 ROIC by Industry for U.S.-Based Companies, 1995–2023

EXHIBIT 8.10 ROIC by Industry for U.S.-Based vs. Europe-Based Companies, 1995–2023

EXHIBIT 8.11 Variation in ROIC within U.S. Industries, 2019–2023

EXHIBIT 8.12 ROIC Decay Through Economic Crisis and Recovery

EXHIBIT 8.13 ROIC Decay for U.S. Branded Consumer Goods Companies

EXHIBIT 8.14 ROIC Transition Probability

EXHIBIT 8.15 ROIC Including and Excluding Goodwill, 1963–2023

Chapter 9

EXHIBIT 9.1 Variation in Revenue Growth by Industry: U.S.-Based Companies

EXHIBIT 9.2 Value Creation from Alternative Growth Scenarios

EXHIBIT 9.3 Value Creation from Organic Growth vs. Acquisitions

EXHIBIT 9.4 Variation in Growth over Product Life Cycle

EXHIBIT 9.5 Walmart and eBay: Growth Trajectories

EXHIBIT 9.6 The Challenge of Sustaining High Growth

EXHIBIT 9.7 Long-Term Revenue Growth for U.S.-Based Companies, 1965–2023

EXHIBIT 9.8 Long-Term Revenue Growth for Europe-Based Companies, 1997–2023

EXHIBIT 9.9 Distribution of Growth Rates, U.S.-Based Companies

EXHIBIT 9.10 Revenue Growth by Industry: U.S.-Based vs. Europe-Based Companies

EXHIBIT 9.11 Volatile Growth by Industry, U.S.-Based Companies

EXHIBIT 9.12 Revenue Growth Decay Through Crises and Recoveries: U.S.-Based vs. E...

EXHIBIT 9.13 Revenue Growth Transition Probability for U.S.-Based vs. Europe-Base...

Chapter 10

EXHIBIT 10.1 Frameworks for DCF-Based Valuation

EXHIBIT 10.2 Enterprise Valuation of a Single-Business Company

EXHIBIT 10.3 Enterprise Valuation of a Multi-Business Company

EXHIBIT 10.4 GlobalCo: Enterprise DCF Valuation

EXHIBIT 10.5 GlobalCo: Income Statement and Shareholders’ Equity Statement

EXHIBIT 10.6 GlobalCo: Balance Sheet

EXHIBIT 10.7 GlobalCo: Net Operating Profit after Taxes (NOPAT)

EXHIBIT 10.8 GlobalCo: Invested Capital and Total Funds Invested

EXHIBIT 10.9 GlobalCo: Forecast Revenue Growth and ROIC

EXHIBIT 10.10 GlobalCo: Projected Free Cash Flow

EXHIBIT 10.11 GlobalCo: Continuing Value

EXHIBIT 10.12 GlobalCo: Weighted Average Cost of Capital

EXHIBIT 10.13 GlobalCo: Economic-Profit Summary

EXHIBIT 10.14 GlobalCo: Valuation Using Discounted Economic Profit

EXHIBIT 10.15 GlobalCo: Valuation Using Adjusted Present Value

EXHIBIT 10.16 GlobalCo: Forecast of Interest Tax Shields

EXHIBIT 10.17 GlobalCo: Equity Cash Flow Summary

EXHIBIT 10.18 GlobalCo: Valuation Using Cash Flow to Equity

EXHIBIT 10.19 The Language of Cash Flow

EXHIBIT 10.20 BrandCo: Income Statement and Reorganized Balance Sheet

EXHIBIT 10.21 VidCo: Key Financial Figures

Chapter 11

EXHIBIT 11.1 An Example of Invested Capital

EXHIBIT 11.2 An Example of NOPAT

EXHIBIT 11.3 An Example of Free Cash Flow

EXHIBIT 11.4 Costco: Balance Sheet

EXHIBIT 11.5 Costco: Invested Capital and Total Funds Invested

EXHIBIT 11.6 Costco: Operating Working Capital

EXHIBIT 11.7 Sources of Financing

EXHIBIT 11.8 Costco: Reorganized Deferred Taxes

EXHIBIT 11.9 Costco: Income Statement

EXHIBIT 11.10 Costco: NOPAT and Its Reconciliation to Net Income

EXHIBIT 11.11 Costco: Tax Reconciliation Table

EXHIBIT 11.12 Costco: Operating Cash Taxes

EXHIBIT 11.13 Costco: Statement of Shareholders’ Equity

EXHIBIT 11.14 Costco: Free Cash Flow and Cash Flow to Investors

EXHIBIT 11.15 Costco: Changes in Property, Plant, and Equipment

EXHIBIT 11.16 Ratio Analysis: Consolidated Financial Statements

Chapter 12

EXHIBIT 12.1 Costco vs. Peer Group: Return on Invested Capital

EXHIBIT 12.2 Return on Invested Capital Following Acquisition

EXHIBIT 12.3 Costco vs. Peer Group: ROIC Tree, 2023

EXHIBIT 12.4 Costco vs. Peer Group: Working Capital in Days

EXHIBIT 12.5 Airline A and Airline B: Financial and Operating Statistics

EXHIBIT 12.6 Operating Drivers of Labor Expenses to Revenues, 2023

EXHIBIT 12.7 Compass and Sodexo: Revenue Growth Analysis

EXHIBIT 12.8 Effect of Acquisitions on Revenue Growth

EXHIBIT 12.9 Retailer A and Retailer B: Operating Statistics

EXHIBIT 12.10 Retailer A and Retailer B: Organic Revenue Growth Analysis, 2022

EXHIBIT 12.11 Costco vs. Peer Group: Measuring Coverage

EXHIBIT 12.12 Costco vs. Peer Group: Operating Value to EBITDA

EXHIBIT 12.13 ShipCo: Income Statement and Balance Sheet

EXHIBIT 12.14 DefenseCo ROIC Decomposition

Chapter 13

EXHIBIT 13.1 Sample Workbook

EXHIBIT 13.2 Colgate-Palmolive: Current Liabilities on the Balance Sheet

EXHIBIT 13.3 Costco: Sample Revenue Forecast

EXHIBIT 13.4 Partial Forecast of the Income Statement

EXHIBIT 13.5 Typical Forecast Drivers for the Income Statement

EXHIBIT 13.6 Completed Forecast of the Income Statement

EXHIBIT 13.7 Historical Balance Sheet

EXHIBIT 13.8 Forecast of Reported Taxes

EXHIBIT 13.9 Stock vs. Flow Example

EXHIBIT 13.10 Typical Forecast Drivers and Ratios for the Balance Sheet

EXHIBIT 13.11 Partial Forecast of the Balance Sheet

EXHIBIT 13.12 Statement of Shareholders’ Equity

EXHIBIT 13.13 Forecast Balance Sheet: Sources of Financing

EXHIBIT 13.14 Expected Inflation vs. Growth in the Consumer Price Index

EXHIBIT 13.15 HouseholdCo: Annual Report

EXHIBIT 13.16 PartsCo: Consolidated Financial Statements

Chapter 14

EXHIBIT 14.1 Continuing Value’s Contribution to Total Value

EXHIBIT 14.2 Impact of Continuing-Value Assumptions

EXHIBIT 14.3 Comparison of Total-Value Estimates Using Different Forecast Horizons

EXHIBIT 14.4 Valuation Using Five-Year Explicit Forecast Period

EXHIBIT 14.5 Valuation Using Eight-Year Explicit Forecast Period

EXHIBIT 14.6 Gradual Decline in Average ROIC According to Continuing-Value Formul...

EXHIBIT 14.7 Innovation Inc.: Free Cash Flow Forecast and Valuation

EXHIBIT 14.8 Innovation Inc.: Valuation by Components

EXHIBIT 14.9 Innovation Inc.: Comparison of Continuing-Value Approaches

EXHIBIT 14.10 Correct and Incorrect Methods of Forecasting Base FCF

EXHIBIT 14.11 Continuing-Value Estimates for a Sporting Goods Company

EXHIBIT 14.12 Rates of Return Implied by Alternative Continuing-Value Formulas

EXHIBIT 14.13 ApparelCo: Free Cash Flows and Economic Profit

Chapter 15

EXHIBIT 15.1 Costco: Weighted Average Cost of Capital (WACC)

EXHIBIT 15.2 S&P 500 Real and Nominal Expected Returns, 1962–2022

EXHIBIT 15.3 Cumulative Returns for Various Intervals, 1900–2023

EXHIBIT 15.4 Cost of Equity Using the Capital Asset Pricing Model (CAPM)

EXHIBIT 15.5 Costco: Stock Returns, 2018–2023

EXHIBIT 15.6 Unlevered Beta Estimates by Industry

EXHIBIT 15.7 Effect of the Dot-Com Bubble on Beta

EXHIBIT 15.8 Costco: Cost of Equity Using the Fama-French Model, August 2023

EXHIBIT 15.9 Costco: Trading Data on Corporate Debt, August 2023

EXHIBIT 15.10 Corporate Yield Spread over U.S. Treasuries by Bond Rating, August 2023

EXHIBIT 15.11 Median Debt to Value by Industry, 2023

EXHIBIT 15.12 ConglomCo and Market Returns

Chapter 16

EXHIBIT 16.1 Sample Comprehensive Valuation Buildup

EXHIBIT 16.2 Coca-Cola Company: Publicly Traded Equity Investments, December 2023

EXHIBIT 16.3 Valuation of Equity Using Scenario Analysis

EXHIBIT 16.4 TechCo Convertible Debt, December 2023

EXHIBIT 16.5 TechCo Employee Options, December 2023

Chapter 17

EXHIBIT 17.1 ROIC Impact of Small Changes: Sample Price and Cost Trends

EXHIBIT 17.2 Sample Sensitivity Analysis

EXHIBIT 17.3 Valuation Isocurves by Growth and Margin

EXHIBIT 17.4 Key Value Drivers by Scenario

EXHIBIT 17.5 Example of a Scenario Approach to DCF Valuation

Chapter 18

EXHIBIT 18.1 Multiples for Packaged-Foods Companies

EXHIBIT 18.2 Sample Sum-of-Parts Valuation

EXHIBIT 18.3 Pharmaceuticals: Backward- and Forward-Looking Multiples, 2024

EXHIBIT 18.4 P/E Multiple Distorted by Capital Structure

EXHIBIT 18.5 Enterprise-Value-to-EBIT Multiple Distorted by Acquisition Accounting

EXHIBIT 18.6 Enterprise-Value-to-EBITDA Multiple Distorted by Capital Investment

EXHIBIT 18.7 Difference between Pre- and Post-tax Earnings Multiples for U.S. St...

EXHIBIT 18.8 Enterprise Value Multiples and Complex Ownership

EXHIBIT 18.9 Peer Groups by ROIC and Growth

EXHIBIT 18.10 PEG Ratios Distorted by ROIC Differences

Chapter 19

EXHIBIT 19.1 ConsumerCo: Valuation Summary, January 2025

EXHIBIT 19.2 ConsumerCo: Equity Value Buildup, January 2025

EXHIBIT 19.3 ConsumerCo: How Changes in ROIC and Growth Affect Value

EXHIBIT 19.4 ConsumerCo: Historical Investments, 2020–2025

EXHIBIT 19.5 Breakdown of Return on Invested Capital at Each Level of Analysis

EXHIBIT 19.6 ConsumerCo: Eliminations and Consolidation, 2025

EXHIBIT 19.7 ConsumerCo: Public Information for Business Segments, 2025

EXHIBIT 19.8 ConsumerCo: WACC Estimates, January 2025

EXHIBIT 19.9 ConsumerCo: Multiples for Peer Branded-Product Companies, January 2025

EXHIBIT 19.10 ConsumerCo: Valuation with Multiples, January 2025

EXHIBIT 19.11 BreakfastCo: Selected Financial Division Data

EXHIBIT 19.12 ATVCo: Income Statement and Balance Sheet

Chapter 20

EXHIBIT 20.1 TaxCo: Income Statement by Geography

EXHIBIT 20.2 TaxCo: Operating Taxes and NOPAT by Geography

EXHIBIT 20.3 TaxCo: Calculating Taxes Using a Tax Table Reported in Percent

EXHIBIT 20.4 TaxCo: Calculating Taxes Using a Tax Table Reported in Dollars

EXHIBIT 20.5 Costco: Tax Reconciliation Table

EXHIBIT 20.6 Costco: Estimation of Operating Taxes

EXHIBIT 20.7 Costco: Reconciling Income Taxes

EXHIBIT 20.8 Costco: Deferred Taxes, Reported

EXHIBIT 20.9 Costco: Deferred Taxes, Reorganized

EXHIBIT 20.10 Costco: Treatment of Deferred Taxes on the Reorganized Balance Sheet...

EXHIBIT 20.11 ToyCo: Tax Reconciliation Table

EXHIBIT 20.12 ToyCo: Deferred-Tax Assets and Liabilities

Chapter 21

EXHIBIT 21.1 Boston Scientific: Income Statement

EXHIBIT 21.2 Boston Scientific: Litigation Expenses by Year

EXHIBIT 21.3 EBIT vs. EBITA Margin, 2023

EXHIBIT 21.4 Boston Scientific: Restructuring Charges

EXHIBIT 21.5 Treatment of Provisions and Reserves

EXHIBIT 21.6 Provisions and Reserves in the Financial Statements

EXHIBIT 21.7 ROIC with Provisions and Reserve

EXHIBIT 21.8 Provisions and Reserves in the Notes

EXHIBIT 21.9 Free Cash Flow with Provisions and Reserves

EXHIBIT 21.10 Enterprise DCF with Provisions and Reserves

Chapter 22

EXHIBIT 22.1 FlightCo: Valuation of the Operating Lease

EXHIBIT 22.2 FlightCo: Financial Statement Accounts Related to Leases

EXHIBIT 22.3 FlightCo: Financial Statements

EXHIBIT 22.4 FlightCo: NOPAT and Reconciliation to Net Income

EXHIBIT 22.5 FlightCo: Free Cash Flow and Its Reconciliation

EXHIBIT 22.6 FlightCo: Weighted Average Cost of Capital (WACC)

EXHIBIT 22.7 FlightCo: Enterprise DCF Valuation

EXHIBIT 22.8 FlightCo: Cash Flow to Equity Holders

EXHIBIT 22.9 FlightCo: Valuation Using Cash Flow to Equity

EXHIBIT 22.10 Costco: Note on Leases, 2023

EXHIBIT 22.11 Costco: Lease Adjustments, 2023

EXHIBIT 22.12 Costco: Operating Lease Valuation, 2019

EXHIBIT 22.13 PharmaCo Financial Statements

Chapter 23

EXHIBIT 23.1 Kellanova: Pension Note in Annual Report, Funded Status, 2023

EXHIBIT 23.2 Kellanova: Pension and Other Postretirement Expenses

EXHIBIT 23.3 Kellanova: EBITA Adjusted for Pensions

EXHIBIT 23.4 Kellanova: Capital Structure with Pensions

EXHIBIT 23.5 The Unlevering Process with Pensions

Chapter 24

EXHIBIT 24.1 PharmaCo: Reorganized Financial Statements

EXHIBIT 24.2 PharmaCo: Capitalization of R&D

EXHIBIT 24.3 PharmaCo: NOPAT Adjusted for R&D Capitalization

EXHIBIT 24.4 PharmaCo: Free Cash Flow

EXHIBIT 24.5 PharmaCo: ROIC, 2002–2025

EXHIBIT 24.6 PharmaCo: ROIC at Different Estimates of R&D Asset Lifetime, 2025

EXHIBIT 24.7 Impact of Adjusting ROIC for Intangible Investments

EXHIBIT 24.8 TradeCo: Financial Statements

EXHIBIT 24.9 TradeCo: ROIC and NOPAT Margin

EXHIBIT 24.10 Impact of Production Outsourcing on ROIC

EXHIBIT 24.11 DiversiCo: Economic Profit Scaled by Revenues

EXHIBIT 24.12 Better Performance Comparison with Economic Profit over Revenues

Chapter 25

EXHIBIT 25.1 Returns When Profits Are Proportional to Net Invested Capital

EXHIBIT 25.2 Returns When Cash Flows Are Proportional to Gross Invested Capital

EXHIBIT 25.3 Returns under Inflation: ROIC vs. CFROI

EXHIBIT 25.4 Pretax ROIC and CFROI per Sector, 2003–2013

Chapter 26

EXHIBIT 26.1 Historical Inflation Rate in Developed and Emerging Economies

EXHIBIT 26.2 Financial Projections without Inflation

EXHIBIT 26.3 Financial Projections with Inflation and Incomplete Pass-On

EXHIBIT 26.4 Financial Projections with Full Inflation Pass-On

EXHIBIT 26.5 Indexed Historical Financials Under Inflation

EXHIBIT 26.6 Financial Projections Under Inflation

EXHIBIT 26.7 Nominal and Real WACC Under Inflation

Chapter 27

EXHIBIT 27.1 Cash Flows Projected and Discounted Under Consistent Monetary Assump...

EXHIBIT 27.2 WACC Measures for Mexican Subsidiary of German Parent Company

EXHIBIT 27.3 Brazilian Inflation-Adjusted Exchange Rate

EXHIBIT 27.4 Diversification of Real Currency Risk

EXHIBIT 27.5 Currency Translation Approaches

EXHIBIT 27.6 Currency Translation

Chapter 28

EXHIBIT 28.1 Portfolio Assessment Framework

EXHIBIT 28.2 Sources of Competitive Advantage

EXHIBIT 28.3 HexaCorp: Summary Portfolio Assessment

EXHIBIT 28.4 HexaCorp: Assessment of Market Attractiveness and Better Ownership

EXHIBIT 28.5 HexaCorp: Summary of Value Creation Opportunities

EXHIBIT 28.6 Distribution of TSR by Levels of Diversification

Chapter 29

EXHIBIT 29.1 Ranking of Investment Projects at Aggregate Portfolio Level

EXHIBIT 29.2 Improvement Opportunity at Different Levels of Review

EXHIBIT 29.3 Value Driver Tree with Three Horizons

EXHIBIT 29.4 Basic Value Driver Tree: Manufacturing Company

EXHIBIT 29.5 Basic Value Driver Tree: Grocery Retailer

EXHIBIT 29.6 Alternative Value Driver Trees for a Bicycle Repair Company

EXHIBIT 29.7 Combined Location and Customer Value Driver Trees: Bicycle Repair Co...

EXHIBIT 29.8 Value Driver Tree for New Geography: Bicycle Repair Company

EXHIBIT 29.9 Aligning Operating Initiatives and Value Drivers: Manufacturing Company

EXHIBIT 29.10 Key Value Drivers: Pharmaceutical Company

Chapter 31

EXHIBIT 31.1 Acquisition Evaluation Framework

EXHIBIT 31.2 Value Creation for Given Performance Improvements and Premium Paid

EXHIBIT 31.3 Selected Deals: Significant Improvements

EXHIBIT 31.4 Historical M&A Activity: U.S. and European Transactions

EXHIBIT 31.5 Success Rates of Acquisition Strategies

EXHIBIT 31.6 Acquisition Results Depend on Overall Growth

EXHIBIT 31.7 Sample Framework for Estimating Cost Savings

EXHIBIT 31.8 Automotive Merger: Estimated Cost Savings

EXHIBIT 31.9 Synergy and Cost: Time to Realization

EXHIBIT 31.10 Paying with Cash vs. Stock: Impact on Value

EXHIBIT 31.11 Earnings per Share (EPS) Accretion with Value Destruction

EXHIBIT 31.12 Market Reaction to EPS Impact of Acquisitions

Chapter 32

EXHIBIT 32.1 Value of Divestitures

EXHIBIT 32.2 Earnings Dilution Through Divestitures

Chapter 33

EXHIBIT 33.1 How Attrition Affects Net Revenues and Market Share

EXHIBIT 33.2 Cohort Analysis Revealing Trends Underlying Corporate Attrition Rates

EXHIBIT 33.3 Retention Rates Show Decreasing Customer Loyalty Over Time

EXHIBIT 33.4 User-Based DCF Valuation of GolDigCo

EXHIBIT 33.5 Enterprise DCF Valuation of GolDigCo

Chapter 34

EXHIBIT 34.1 Framework for Analyzing Value Impact of Sustainability Levers

EXHIBIT 34.2 Marginal Abatement Cost Curve

Chapter 35

EXHIBIT 35.1 Cash Deployment: Value Creation Hierarchy

EXHIBIT 35.2 MaxNV: Projections of Operating Cash Flows

EXHIBIT 35.3 MaxNV: Estimates of Cash Surplus and Deficit

EXHIBIT 35.4 MaxNV: Deciding on Payout

EXHIBIT 35.5 Capital Structure’s Limited Impact on Enterprise Value

EXHIBIT 35.6 More to Lose Than to Gain from Capital Structure Management

EXHIBIT 35.7 Credit Ratings for Large Companies: Mostly between A+ and BBB–

EXHIBIT 35.8 Credit Rating vs. Interest and Debt Coverage

EXHIBIT 35.9 Default Probability and Credit Spread

EXHIBIT 35.10 Surplus Cash Flow, Given Earnings of $1 Billion

EXHIBIT 35.11 Valuation Unrelated to Payout Level or Payout Mix

EXHIBIT 35.12 Relative Performance of Timing Share Repurchases

EXHIBIT 35.13 Value Creation from Share Repurchases vs. Alternatives for Cash Depl...

Chapter 36

EXHIBIT 36.1 Fashion Co.: Valuation in Line with Close Peers

EXHIBIT 36.2 Investors Segmented by Investment Strategies

EXHIBIT 36.3 Intrinsic Investors Have Greatest Impact on Share Price

EXHIBIT 36.4 Lowe’s: Operating Statistics and ROIC

EXHIBIT 36.5 Impact of Change in Two-Year EPS Estimate Revision vs. Short-Term Ear...

EXHIBIT 36.6 Fundamentals vs. Consensus Estimates

Chapter 37

EXHIBIT 37.1 AxelEdge: Proposed Deal Structure

EXHIBIT 37.2 AxelEdge: Capital Structure Analysis

EXHIBIT 37.3 AxelEdge: Term Loan Forecast Model

EXHIBIT 37.4 AxelEdge: Income Statement Forecast

EXHIBIT 37.5 AxelEdge: Cash Flow to Equity

EXHIBIT 37.6 AxelEdge: Internal Rate of Return

EXHIBIT 37.7 Valuation of Two Investments by Discount Rate

EXHIBIT 37.8 Impact on IRR from Accelerating Cash Flows

EXHIBIT 37.9 AxelEdge: Sources of Value Creation

EXHIBIT 37.10 AxelEdge: Investment Analysis Using the Relative Value Index

Chapter 38

EXHIBIT 38.1 Venture-Capital Valuation Methodologies

EXHIBIT 38.2 Pre-money and Post-money Valuation

EXHIBIT 38.3 The Five Steps of the Venture Capital Method

EXHIBIT 38.4 Estimating the Exit Value

EXHIBIT 38.5 Evolution of Ownership in U.S. Start-Ups

EXHIBIT 38.6 Converting Expected Return into Target Return

EXHIBIT 38.7 Putting the Pieces Together

Chapter 39

EXHIBIT 39.1 Aurora Elements: Target Market Revenues

EXHIBIT 39.2 Online Penetration by Industry, 2024

EXHIBIT 39.3 Aurora’s Target Market: Online Penetration and Company Market Share

EXHIBIT 39.4 Cohort Model: Sample Customer Life Cycle Model

EXHIBIT 39.5 Cohort Model: Sample Revenue Projection

EXHIBIT 39.6 Key Value Drivers: Long-Run Economics

EXHIBIT 39.7 Aurora Elements: Free Cash Flow by Business

EXHIBIT 39.8 Aurora Elements: Key Value Drivers by Scenario, 2034 Forecast

EXHIBIT 39.9 Aurora Elements: Probability-Weighted Expected Value

Chapter 40

EXHIBIT 40.1 Valuation under Uncertainty: Approaches

EXHIBIT 40.2 Value of Flexibility to Defer Investment

EXHIBIT 40.3 When Is Flexibility Valuable?

EXHIBIT 40.4 Drivers of Flexibility Value

EXHIBIT 40.5 Classification of Real Options

EXHIBIT 40.6 Contingent Payoffs for Investment Project, Twin Security, and Risk-F...

EXHIBIT 40.7 Valuation Result: Standard vs. Contingent NPV

EXHIBIT 40.8 Application Opportunities for Real-Option Valuation vs. Decision Tre...

EXHIBIT 40.9 Valuation Result for Mixed Price and Quantity Risk

EXHIBIT 40.10 Four-Step Process for Valuing Flexibility

EXHIBIT 40.11 Event Tree: Factory Without Flexibility

EXHIBIT 40.12 Decision Tree: Option to Expand Factory

EXHIBIT 40.13 Decision Tree: Option to Abandon Factory

EXHIBIT 40.14 Decision Tree: Option to Expand or Abandon Factory

EXHIBIT 40.15 Event Tree: R&D Option with Technological Risk

EXHIBIT 40.16 Decision Tree: R&D Option with Technological Risk

EXHIBIT 40.17 Event Tree: R&D Option with Technological and Commercial Risk

EXHIBIT 40.18 Decision Tree: R&D Option with Technological and Commercial Risk

Chapter 41

EXHIBIT 41.1 No Country Risk Premium for Brazilian Equity Market

EXHIBIT 41.2 No Country Risk Premium for Brazilian Equity Market

EXHIBIT 41.3 Scenario DCF vs. Country Risk Premium DCF

EXHIBIT 41.4 Probability of Economic Distress Given Small Variations in Risk Premium

EXHIBIT 41.5 ConsuCo: ROIC and Financials, Base Case vs. Downside Scenario

EXHIBIT 41.6 ConsuCo: Scenario DCF Valuation

EXHIBIT 41.7 ConsuCo: Multiples Analysis vs. Peers

Chapter 42

EXHIBIT 42.1 The Long-Term View: Free Cash Flow and DCF Volatility

EXHIBIT 42.2 Share Prices and Earnings per Share: 15 Cyclical Companies

EXHIBIT 42.3 Actual EPS and Consensus EPS Forecasts: 15 Cyclical Companies

EXHIBIT 42.4 When the Cycle Changes

EXHIBIT 42.5 Market Values of Cyclical Companies: Forecasts with Three Levels of...

EXHIBIT 42.6 ROIC and Investment Rate: Commodity Chemicals, 1980–2013

EXHIBIT 42.7 Relative Returns from Capital Expenditure Timing

Chapter 43

EXHIBIT 43.1 Income Sources for European Banks, 1988–2022

EXHIBIT 43.2 Increased Cyclicality in Banking

EXHIBIT 43.3 ABC Bank: Historical Financial Statements

EXHIBIT 43.4 ABC Bank: Historical Cash Flow to Equity

EXHIBIT 43.5 Generic Value Driver Tree for Retail Banking

EXHIBIT 43.6 ABC Bank: Financial Forecast

EXHIBIT 43.7 ABC Bank: Valuation

EXHIBIT 43.8 Annual Losses for U.S. Banks by Loan Category

EXHIBIT 43.9 Value Drivers: Trading Activities

EXHIBIT 43.10 Value Drivers: Asset Management

Appendix C

EXHIBIT C.1 Unlevered Cost of Equity

EXHIBIT C.2 Levered Cost of Equity

EXHIBIT C.3 Levered Beta

Appendix G

EXHIBIT G.1 Comparing Risk Premiums Across Countries and over Time

EXHIBIT G.2 Share of Equity Returns Explained by Industry Composition of Index

Appendix I

EXHIBIT I.1 Costco: Income Statement

EXHIBIT I.2 Costco: Balance Sheet

EXHIBIT 1.3 Costco: Statement of Shareholders’ Equity

EXHIBIT I.4 Costco: Tax Reconciliation Table

EXHIBIT I.5 Costco: NOPAT and Its Reconciliation to Net Income

EXHIBIT I.6 Costco: Operating Cash Taxes

EXHIBIT I.7 Costco: Reorganized Deferred Taxes

EXHIBIT I.8 Costco: Invested Capital and Total Funds Invested

EXHIBIT I.9 Costco: Reconciliation of Total Funds Invested

EXHIBIT I.10 Costco: Income Statement Forecast Ratios

EXHIBIT I.11 Costco: Balance Sheet Forecast Ratios—Invested Capital

EXHIBIT I.12 Costco: Balance Sheet Forecast Ratios—Sources of Financing

EXHIBIT I.13 Costco: Free Cash Flow and Cash Flow to Investors

EXHIBIT I.14 Costco: Reconciliation of Cash Flow to Investors

EXHIBIT I.15 Costco: Continuing Value

EXHIBIT I.16 Costco: Weighted Average Cost of Capital (WACC)

EXHIBIT I.17 Costco: Enterprise DCF Valuation

EXHIBIT I.18 Costco: ROIC and Economic Profit

EXHIBIT I.19 Costco: Valuation Using Economic Profit

EXHIBIT I.20 Costco: Value per Share Sensitivity to Key Inputs

Guide

COVER

TABLE OF CONTENTS

TITLE PAGE

COPYRIGHT

ABOUT THE AUTHORS

PREFACE

ACKNOWLEDGMENTS

BEGIN READING

APPENDIX A: DISCOUNTED ECONOMIC PROFIT EQUALS DISCOUNTED FREE CASH FLOW

APPENDIX B: DERIVATION OF FREE CASH FLOW, WEIGHTED AVERAGE COST OF CAPITAL, AND ADJUSTED PRESENT VALUE

APPENDIX C: LEVERING AND UNLEVERING THE COST OF EQUITY

APPENDIX D: LEVERAGE AND THE PRICE-TO-EARNINGS MULTIPLE

APPENDIX E: OTHER CAPITAL STRUCTURE ISSUES

APPENDIX F: TECHNICAL ISSUES IN ESTIMATING THE MARKET RISK PREMIUM

APPENDIX G: GLOBAL, INTERNATIONAL, AND LOCAL CAPM

APPENDIX H: TWO-STAGE FORMULA FOR CONTINUING VALUE

APPENDIX I: A VALUATION OF COSTCO WHOLESALE

INDEX

END USER LICENSE AGREEMENT

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VALUATION

MEASURING AND MANAGING THE VALUE OF COMPANIES

EIGHTH EDITION

McKinsey & Company

Tim Koller

Marc Goedhart

David Wessels

Copyright © 1990, 1994, 2000, 2005, 2010, 2015, 2020, 2025 by McKinsey & Company.

All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Identifiers: LCCN 2025905243 | ISBN 978-1-394-27947-0 (University edition) | ISBN 978-1-394-27948-7 (ePub) | ISBN 978-1-394-27949-4 (ePDF) | ISBN 978-1-394-27941-8 (Cloth edition) | ISBN 978-1-394-27951-7 (Cloth edition with DCF Model download) | ISBN 978-1-394-27944-9 (Workbook) | ISBN 978-1-394-27950-0 (DCF Model Web download)

Cover Design: Jon Boylan

Cover Image: © starlineart/stock.adobe.com

About the Authors

The authors are all current or former consultants of McKinsey & Company’s Strategy & Corporate Finance Practice. Together, they have more than 100 years of experience in consulting and financial education.

* * *

Tim Koller is a partner in McKinsey’s Denver, Colorado, office and spent most of his career in the firm’s New York office. He is a founder of McKinsey’s Strategy and Corporate Finance Insights team, a global group of corporate-finance expert consultants. In his 40 years in consulting, Tim has served clients globally on corporate strategy and capital markets, acquisitions and divestitures, and strategic planning and resource allocation. He leads the firm’s research activities in valuation and capital markets. Before joining McKinsey, he worked with Stern Stewart & Company and with Mobil Corporation. He received his MBA from the University of Chicago.

* * *

Marc Goedhart is a senior knowledge expert in McKinsey’s Amsterdam office and an endowed professor of corporate valuation at Rotterdam School of Management (RSM), Erasmus University. Over the past 30 years, Marc has served clients across Europe on portfolio restructuring, M&A transactions, and performance management. He received his PhD in finance from Erasmus University.

* * *

David Wessels is an adjunct professor of finance at the Wharton School of the University of Pennsylvania. Named by Bloomberg Businessweek as one of America’s top business school instructors, he teaches courses on corporate valuation and private equity at the MBA and executive MBA levels. David is also a director in Wharton’s executive education group, serving on the executive development faculties of several Fortune 500 companies. A former consultant with McKinsey, he received his PhD from the University of California at Los Angeles.

* * *

McKinsey & Company is a global management consulting firm, working with clients across the private, public, and social sectors. McKinsey combines bold strategies and transformative technologies to help organizations innovate more sustainably, achieve lasting gains in performance, and build workforces that will thrive for this generation and the next.

Preface

The first edition of Valuation appeared in 1990, and we are encouraged that it and the subsequent editions have continued to attract readers around the world. We believe the book appeals to readers everywhere because the approach it advocates is grounded in universal economic principles. While we continue to improve, update, and expand the text as our experience grows and as business and finance continue to evolve, those universal principles do not change.

In the 35 years since that first edition, managers and executives have dealt with major economic challenges, including the COVID-19 pandemic, the economic crisis of the late 2000s, and the fallout from the internet boom at the turn of the century. All these events have strengthened our conviction that the core principles of value creation are general economic rules that continue to apply in all market circumstances. Thus, the extraordinarily high anticipated profits represented by stock prices during the internet bubble never materialized, because there was no “new economy.” Similarly, the extraordinarily high profits seen in the financial sector for the two years preceding the start of the 2007–2009 financial crisis were not “real,” in the sense that they didn’t adequately set aside reserves for loan losses. The laws of competition should have alerted investors that those extraordinary profits couldn’t last and might not be real.

Over time, we have also seen that, for some companies, some of the time, the stock market may not be a reliable indicator of value. At the time of this writing, ten different companies had market capitalizations greater than $1 trillion. We cannot predict whether all these companies can grow enough and maintain their profits and cash flows sufficiently to justify these values. Knowing that value signals from the stock market may occasionally be unreliable makes us even more certain that managers must always understand the underlying, intrinsic value of their companies—and thus how they can create more value. In our view, clear thinking about valuation and skill in using valuation to guide business decisions are prerequisites for company success.

Furthermore, there remains confusion about what it means to truly create value for shareholders. As we explain in Chapter 1, creating value for shareholders is not the same as pumping up today’s share price. Rather, it means creating value for the collective of current and future shareholders by applying the techniques explained in this book. As they do so, companies will thrive, and ultimately, society as a whole will benefit.

Why This Book

If CEOs and other executives are to do their jobs well and fulfill their responsibilities, they need to understand how value is created. This book’s practical focus reflects its origins as a handbook for McKinsey consultants. We publish it for the benefit of current and future managers who want their companies to create value and also for investors. It aims to demystify the field of valuation and clarify the linkages between strategy and finance. So while it draws on leading-edge academic thinking, it is primarily a how-to book and one we hope you will use again and again. This is no coffee-table tome: if we have done our job well, it will soon be full of underlining, marginal notations, and highlighting.

The book’s messages are simple: Companies thrive when they create real economic value for their shareholders. Companies create value by investing capital at rates of return that exceed their cost of capital. These two truths apply across time and geography. The book explains why these core principles of value creation are genuine and how companies can increase value by applying them.

The technical chapters of the book aim to explain, step-by-step, how to do valuation well. We spell out valuation frameworks that we use in our consulting work, and we illustrate them with detailed case studies that highlight the practical judgments involved in developing and using valuations. Just as important, the management chapters discuss how to use valuation to make good decisions for a company—specifically, by helping with the following tasks:

Decide among alternative business strategies by estimating the value of each strategic choice

Develop a corporate portfolio strategy, based on which business units a corporate parent is best positioned to own and which might perform better under someone else’s ownership

Assess major transactions, including acquisitions and divestitures

Improve a company’s strategic planning and resource allocation so the company’s parts are aligned to execute strategic priorities and create value

Communicate effectively with investors

Design a capital structure that supports the corporation’s strategy and minimizes the risk of financial distress

Structure of the Book

In this eighth edition, we continue to expand the practical application of finance to real business problems, reflecting past economic events, new accounting rules, new developments in academic finance, and our own experiences. The edition is organized into five parts, each with a distinct focus.

Part One, “Foundations of Value,” provides an overview of value creation. We make the case that managers should focus on long-term value creation for current and future shareholders, not just some of today’s shareholders looking for an immediate pop in the share price. We explain the two core principles of value creation: (1) the idea that return on invested capital and growth drive cash flow, which in turn drives value, and (2) the conservation-of-value principle, which says anything that doesn’t increase cash flow doesn’t create value (unless it reduces risk). We devote a chapter each to return on invested capital and to growth, including a new discussion of strategic principles and empirical insights for companies based in Europe.

Part Two, “Core Valuation Techniques,” is a self-contained handbook for using discounted cash flow (DCF) to value a company. The reader will learn how to analyze historical performance, forecast free cash flows, estimate the appropriate opportunity cost of capital, identify sources of value, and interpret results. We also show how to use multiples of comparable companies to supplement DCF valuations.

Part Three, “Advanced Valuation Techniques