Valuation, Fifth Edition: Measuring and Managing the Value of Companies
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The number one guide to corporate valuation is back and better than ever

Thoroughly revised and expanded to reflect business conditions in today's volatile global economy, Valuation, Fifth Edition continues the tradition of its bestselling predecessors by providing up-to-date insights and practical advice on how to create, manage, and measure the value of an organization.

Along with all new case studies that illustrate how valuation techniques and principles are applied in real-world situations, this comprehensive guide has been updated to reflect new developments in corporate finance, changes in accounting rules, and an enhanced global perspective. Valuation, Fifth Edition is filled with expert guidance that managers at all levels, investors, and students can use to enhance their understanding of this important discipline.

Contains strategies for multi-business valuation and valuation for corporate restructuring, mergers, and acquisitionsAddresses how you can interpret the results of a valuation in light of a company's competitive situationAlso available: a book plus CD-ROM package (978-0-470-42469-8) as well as a stand-alone CD-ROM (978-0-470-42457-7) containing an interactive valuation DCF model

Valuation, Fifth Edition stands alone in this field with its reputation of quality and consistency. If you want to hone your valuation skills today and improve them for years to come, look no further than this book.


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.


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