MCKINSEY & COMPANY is a global management-consulting firm that serves leading global organizations across a wide range of industries and functions, helping them create change that matters.

TIM KOLLER is a partner in McKinsey's Stamford, Connecticut office, where he leads a global team of corporate-finance consultants. Tim has served clients globally on corporate strategy and capital markets, mergers, acquisitions and other transactions, and strategic planning and resource allocation.

MARC GOEDHART is a senior expert in McKinsey's Amsterdam office and endowed professor of corporate valuation at Rotterdam School of Management, Erasmus University (RSM).

DAVID WESSELS is an adjunct professor of finance at the Wharton School of the University of Pennsylvania. He was named by Bloomberg Businessweek as one of America's top business school instructors.

MICHAEL CICHELLO is a teaching professor at the McDonough School of Business at Georgetown University.

About the Authors ix

Introduction xi

Part One Questions

1 Why Value Value? 3

2 Finance in a Nutshell 5

3 Fundamental Principles of Value Creation 7

4 Risk and the Cost of Capital 11

5 The Alchemy of Stock Market Performance 15

6 Valuation of ESG and Digital Initiatives 19

7 The Stock Market is Smarter Than You Think 21

8 Return on Invested Capital 27

9 Growth 31

10 Frameworks for Valuation 35

11 Reorganizing the Financial Statements 39

12 Analyzing Performance 43

13 Forecasting Performance 47

14 Estimating Continuing Value 51

15 Estimating the Cost of Capital 55

16 Moving from Enterprise Value to Value per Share 59

17 Analyzing the Results 63

18 Using Multiples 67

19 Valuation by Parts 71

20 Taxes 75

21 Nonoperating Items, Provisions, and Reserves 77

22 Leases 81

23 Retirement Obligations 83

24 Measuring Performance in Capital-Light Businesses 85

25 Alternative Ways to Measure Return on Capital 89

26 Inflation 91

27 Cross-Border Valuation 95

28 Corporate Portfolio Strategy 99

29 Strategic Management: Analytics 103

30 Strategic Management: Mindsets and Behaviors 107

31 Mergers and Acquisitions 111

32 Divestitures 115

33 Capital Structure, Dividends, and Share Repurchases 119

34 Investor Communications 123

35 Emerging Markets 127

36 High-Growth Companies 129

37 Cyclical Companies 131

38 Banks 135

39 Flexibility 139

Part Two Solutions

1 Why Value Value? 145

2 Finance in a Nutshell 147

3 Fundamental Principles of Value Creation 149

4 Risk and the Cost of Capital 151

5 The Alchemy of Stock Market Performance 153

6 Valuation of ESG and Digital Initiatives 155

7 The Stock Market is Smarter Than You Think 157

8 Return on Invested Capital 159

9 Growth 161

10 Frameworks for Valuation 163

11 Reorganizing the Financial Statements 165

12 Analyzing Performance 167

13 Forecasting Performance 169

14 Estimating Continuing Value 173

15 Estimating the Cost of Capital 175

16 Moving from Enterprise Value to Value per Share 177

17 Analyzing the Results 179

18 Using Multiples 181

19 Valuation by Parts 183

20 Taxes 185

21 Nonoperating Items, Provisions, and Reserves 187

22 Leases 189

23 Retirement Obligations 193

24 Measuring Performance in Capital-Light Businesses 195

25 Alternative Ways to Measure Return on Capital 197

26 Inflation 199

27 Cross-Border Valuation 203

28 Corporate Portfolio Strategy 207

29 Strategic Management: Analytics 209

30 Strategic Management: Mindsets and Behaviors 211

31 Mergers and Acquisitions 213

32 Divestitures 215

33 Capital Structure, Dividends, and Share Repurchases 217

34 Investor Communications 219

35 Emerging Markets 223

36 High-Growth Companies 225

37 Cyclical Companies 227

38 Banks 229

39 Flexibility 231

Index 233