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P1: OTA/XYZ P2: ABCJWBT483-fm JWBT483-Mckinsey February 16, 2011 17:11 Printer Name: Hamilton


VALUATION

WORKBOOK

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Founded in 1807, John Wiley & Sons is the oldest independent publishingcompany in the United States. With offices in North America, Europe, Australiaand Asia, Wiley is globally committed to developing and marketing print andelectronic products and services for our customers’ professional and personalknowledge and understanding.

The Wiley Finance series contains books written specifically for financeand investment professionals as well as sophisticated individual investors andtheir financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financialinstrument analysis, as well as much more.

For a list of available titles, visit our Web site at www.WileyFinance.com.

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VALUATIONWORKBOOK

STEP-BY-STEP EXERCISESAND TESTS TO HELP YOUMASTER VALUATION

FIFTH EDITION

McKinsey & Company

Tim KollerMarc GoedhartDavid WesselsErik Benrud

JOHN WILEY & SONS, INC.

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Copyright © 1990, 1994, 2000, 2005, 2011 by McKinsey & Company. All rights reserved.

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

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Contents

About the Authors ix

Introduction xi

Part One Questions

1 Why Value Value? 3

2 Fundamental Principles of Value Creation 6

3 The Expectations Treadmill 9

4 Return on Invested Capital 12

5 Growth 15

6 Frameworks for Valuation 18

7 Reorganizing the Financial Statements 22

8 Analyzing Performance and Competitive Position 26

9 Forecasting Performance 30

10 Estimating Continuing Value 35

11 Estimating the Cost of Capital 40

12 Moving from Enterprise Value to Value per Share 44

13 Calculating and Interpreting Results 48

14 Using Multiples to Triangulate Results 52

15 Market Value Tracks Return on Invested Capitaland Growth 55

16 Markets Value Substance, Not Form 59

17 Emotions and Mispricing in the Market 63

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vi CONTENTS

18 Investors and Managers in Efficient Markets 66

19 Corporate Portfolio Strategy 70

20 Performance Management 73

21 Mergers and Acquisitions 77

22 Creating Value through Divestitures 82

23 Capital Structure 86

24 Investor Communications 90

25 Taxes 94

26 Nonoperating Expenses, One-Time Charges, Reserves,and Provisions 97

27 Leases, Pensions, and Other Obligations 101

28 Capitalized Expenses 105

29 Inflation 107

30 Foreign Currency 114

31 Case Study: Heineken 117

32 Valuing Flexibility 123

33 Valuation in Emerging Markets 126

34 Valuing High-Growth Companies 129

35 Valuing Cyclical Companies 132

36 Valuing Banks 142

Part Two Answers

1 Why Value Value? 149

2 Fundamental Principles of Value Creation 150

3 The Expectations Treadmill 152

4 Return on Invested Capital 154

5 Growth 156

6 Frameworks for Valuation 158

7 Reorganizing the Financial Statements 160

8 Analyzing Performance and Competitive Position 162

9 Forecasting Performance 164

10 Estimating Continuing Value 167

11 Estimating the Cost of Capital 170

12 Moving from Enterprise Value to Value per Share 172


CONTENTS vii

13 Calculating and Interpreting Results 174

14 Using Multiples to Triangulate Results 176

15 Market Value Tracks Return on Invested Capitaland Growth 178

16 Markets Value Substance, Not Form 180

17 Emotions and Mispricing in the Market 182

18 Investors and Managers in Efficient Markets 184

19 Corporate Portfolio Strategy 186

20 Performance Management 188

21 Mergers and Acquisitions 190

22 Creating Value through Divestitures 192

23 Capital Structure 194

24 Investor Communications 197

25 Taxes 199

26 Nonoperating Expenses, One-Time Charges, Reserves,and Provisions 201

27 Leases, Pensions, and Other Obligations 204

28 Capitalized Expenses 207

29 Inflation 209

30 Foreign Currency 216

31 Case Study: Heineken 219

32 Valuing Flexibility 224

33 Valuation in Emerging Markets 226

34 Valuing High-Growth Companies 228

35 Valuing Cyclical Companies 231

36 Valuing Banks 238


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About the Authors

McKinsey & Company is a management-consulting firm that helps lead-ing corporations and organizations make distinctive, lasting, and substan-tial improvements in their performance. Over the past seven decades,the firm’s primary objective has remained constant: to serve as an or-ganization’s most trusted external adviser on critical issues facing seniormanagement.

With consultants deployed from over 80 offices in more than 40 countries,McKinsey advises companies on strategic, operational, organizational, finan-cial, and technological issues. The firm has extensive experience in all majorindustry sectors and primary functional areas, as well as in-depth expertise inhigh-priority areas for today’s business leaders.

Tim Koller is a partner in McKinsey’s New York office. He leads the firm’sCorporate Performance Center and is a member of the leadership group of thefirm’s global corporate finance practice. In his 25 years in consulting Tim hasserved clients globally on corporate strategy and capital markets, mergers andacquisitions (M&A) transactions, and value-based management. He leads thefirm’s research activities in valuation and capital markets. He was formerlywith Stern Stewart & Company and with Mobil Corporation. He received hisMBA from the University of Chicago.

Marc Goedhart is a senior expert in McKinsey’s Amsterdam office and leadsthe firm’s Corporate Performance Center in Europe. Over the past 15 years,Marc has served clients across Europe on portfolio restructuring, capitalmarkets, and M&A transactions. He taught finance as an assistant profes-sor at Erasmus University in Rotterdam, where he also earned a PhD infinance.

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x ABOUT THE AUTHORS

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

Erik Benrud earned his doctorate at the University of Virginia. He is a clin-ical full professor of finance and the CFA Review Coordinator and Advisorat Drexel University. Erik’s publications have appeared in a wide variety ofjournals, and he has won teaching and research awards from Association toAdvance Collegiate Schools of Business (AACSB)-accredited universities. Inaddition to his many years of teaching, he has done consulting work anddelivered seminars on many topics in finance on four continents. He holdsthe Chartered Financial Analyst (CFA), Financial Risk Manager (FRM), andChartered Alternative Investment Advisor (CAIA) designations.

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Introduction

The purpose of any workbook is to actively engage the reader/learner in thetransfer of knowledge from author to reader. Although there are many levelsat which knowledge can be transferred, the Valuation Workbook endeavors toprovide the following three services:

1. A walk-through accompaniment to Valuation: Measuring and Managing theValue of Companies, Fifth Edition.

2. A summary of each chapter.3. Tests of comprehension and skills of many types.

Multiple-choice questions pique your memory as you read the text. Listsand table completions force you to actively rearrange concepts explicitly orimplicitly within the text. Calculation questions allow you to apply the skillsdeployed by the authors in accomplishing the analysis called valuation.

Our aim is to encourage you to question what you read against the back-ground of your own business experience and think about new ways to analyzeand approach valuation issues.

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VALUATION

WORKBOOK

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