vi  Contents 14  Estimating Continuing Value      285 15  Estimating the Cost of Capital      305 16  Moving from Enterprise Value to Value per Share      335 17  Analyzing the Results      357 18  Using Multiples      367 19  Valuation by Parts      391 Part Three  Advanced Valuation Techniques 20  Taxes      413 21  Nonoperating Items, Provisions, and Reserves      427 22  Leases      443 23  Retirement Obligations      457 24  Measuring Performance in Capital-Light Businesses      467 25  Alternative Ways to Measure Return on Capital      483 26  Inflation      493 27  Cross-Border Valuation      507 Part Four  Managing for Value 28  Corporate Portfolio Strategy      527 29  Strategic Management: Analytics      547 30  Strategic Management: Mindsets and Behaviors      571 31  Mergers and Acquisitions      585 32  Divestitures      613 33  Capital Structure, Dividends, and Share Repurchases      633 34  Investor Communications      667 Part Five  Special Situations 35  Emerging Markets      691 36  High-Growth Companies      709 37  Cyclical Companies      725 Contents  vii 38  Banks      733 39  Flexibility      759 Appendix A Discounted Economic Profit Equals Discounted Free Cash Flow      793 Appendix B  Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value      799 Appendix C  Levering and Unlevering the Cost of Equity      805 Appendix D  Leverage and the Price-to-Earnings Multiple      813 Appendix E  Other Capital Structure Issues      817 Appendix F  Technical Issues in Estimating the Market Risk Premium      823 Appendix G  Global, International, and Local CAPM      827 Appendix H  A Valuation of Costco Wholesale      835 Appendix I  Two-Stage Formula for Continuing Value      859 Index      861 ix About the Authors The authors are all current or former consultants of McKinsey & Company’s Strategy & Corporate Finance Practice. Together they have more than 85 years of experience in consulting and financial education. *  *  * Tim Koller is a partner in McKinsey’s Stamford, Connecticut, office, where he is a founder of McKinsey’s Strategy and Corporate Finance Insights team, a global group of corporate-finance expert consultants. In his 35 years in consult- ing, Tim has served clients globally on corporate strategy and capital markets, mergers and acquisitions transactions, and strategic planning and resource allocation. He leads the firm’s research activities in valuation and capital mar- kets. 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 expert in McKinsey’s Amsterdam office and an en- dowed professor of corporate valuation at Rotterdam School of Management, Erasmus University (RSM). Over the past 25 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 execu- tive development faculties of several Fortune 500 companies. A former con- sultant with McKinsey, he received his PhD from the University of California at Los Angeles. x   About the Authors *  *  * McKinsey & Company is a global management consulting firm committed to helping organizations create change that matters. In more than 130 cities and 65 countries, teams help clients across the private, public, and social sectors shape bold strategies and transform the way they work, embed technology where it unlocks value, and build capabilities to sustain the change. Not just any change, but change that matters—for their organizations, their people, and, in turn, society at large.