870  Index
credit health and capital structure, 
253–257
DCF-based models, 178–181
guidelines, 258
revenue growth, 247–253
ROIC, 239–247
Home Depot, 80–81, 116–117
Hotel partnerships with REITs, 48
Hybrid financing, 664
Hybrid securities, 221, 332–333, 337, 
348–355
IBM, 162, 214, 595
Income statements, 205, 221, 267–273, 
459–461. See also Financial 
statements
Income taxes. See Taxes
Index membership, 120–121
Inflation, 493–506
distortion of financial indicators, 
499–500
effect of passing on to customers, 
495–498
extreme, historical analysis of, 
499–500
and financial projections, 500–506
in forecasting, 283–284
and lower value creation, 493–498
Informed investors, 100–101
Initial public offerings (IPOs), 372, 
626, 722–723
Innovative business methods, 135–136
Innovative products, 132
Interest expense/income, 271–272
Interest expenses, 232
Interest tax shield (ITS), 198–199, 
332–333
Internal rate of return (IRR), 484–487
International Financial Reporting 
Standards (IFRS), 338–339, 458, 
521–523, 607
Internet dot-com bubble, 3, 42–43, 44, 
93, 321–322
Intrinsic investors, 671, 672, 676–677
Groupthink, 577–578
Growth. See also Revenue growth
across industries, 169–170
balancing with ROIC, 24–25
components of, 158–159
decay analysis, 171–172
defined, 50
empirical analysis of, 167–172
interaction between ROIC and, 
27–29, 36–40
portfolio treadmill, 167
real revenue growth vs. GDP, 
168–169
relationship to ROIC and cash flow, 
29–33
sustaining, 163–167, 171–172
trends, 168–169
value creation and, 158–163
variation in, 169
Growth companies. See High-growth 
companies
Growth strategies, 38
Guidant, 112
Hedging, 66–67
Heineken, 66–67
High-growth companies, 709–723
uncertainty of, 721–723
valuation process, 710–720
estimating operating margin,
capital intensity, and ROIC, 
717–718
scenario development, 719–720
scenario weighting, 720
sizing market, 714
starting from future viewpoint, 
710–718
working backward to current 
performance, 718–719
Historical analysis, in forecasting, 261
Historical market risk premium, 
311–312 
Historical performance analysis, 
239–258

Index  871
J&J Snack Foods, 72–73, 79–80, 81
Johnson & Johnson, 46, 369, 528–529, 
647
Joint ventures, 626
Kellogg, 458–465, 588
Key value driver formula, 286–289
Leases. See Operating leases
Legal interventions, and ESG, 88
Leverage, 255–256, 819–821
and beta, 811–812
capital structure and credit ratings, 
645–650
and cost of equity, 744–745
and the price-to-earnings multiple, 
813–816
Line item analysis, 244–245, 267
Litigation charges, 434–435
Loss aversion, 579–580
Lowe’s, 679
Lucent, 618
LyondellBasell, 57
Marathon Petroleum, 536
Market access, accelerating, 595
Market bubbles, 103
Market price, 349
Market return, estimating, 308–314
Market risk, 753
Market risk premium, 513–514, 700, 
823–826
Market share performance, defined, 
156
Market value, 669–670
Mars, 90, 139, 140
Marsh, Paul, 311, 312, 832
Marshall, Alfred, 3
Mathematical formulas in value 
creation, 49–52
McKinsey & Co. research, 4, 8, 87, 
141n6, 535, 540, 589, 590, 600, 
616, 619, 624, 676, 683
Mechanical investors, 671, 673
Intrinsic value, 22–23, 669–670
Invested capital, 208
case illustration (Costco), 211–221
defined, 49
goodwill and acquired intangibles, 
215–216
investments in, 230–231
key concepts, 206–208
in multiple business units, 403–404
multiples of, 386
operating working capital, 212–214
other assets and liabilities, 214–215
production equipment and 
facilities, 214
Investment-grade debt, 344–345
Investment rate (IR), 50
Investment returns, in ESG, 89–90
Investments, option to defer, 760, 
763–766
Investor communications, 667–688
and consensus earnings forecasts, 
684–687
earnings guidance, 681–684
and intrinsic investors, 676–677
intrinsic value vs. market value, 
669–670
listening to investors, 680–681
objectives of, 668
targeting by segment, 
674–675
transparency, 676, 677–680
understanding investor base, 667, 
670–675
Investor funds, forecasting, 278–280
Investors:
classification of, 671–675
closet indexers, 673
intrinsic, 671, 672, 676–677
mechanical, 671, 673
opinions of, 680–681
segmentation of, 671–673
traders, 671, 672–673
IPOs (initial public offerings), 372, 
626, 722–723