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VALUATION MEASURING AND MANAGING THE VALUE OF COMPANIES SEVENTH EDITION McKinsey & Company Tim Koller Marc Goedhart David Wessels Cover design: Wiley Copyright © 1990, 1994, 2000, 2005, 2010, 2015, 2020 by McKinsey & Company. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. 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Library of Congress Cataloging-in-Publication Data Names: McKinsey and Company. | Koller, Tim, author. | Goedhart, Marc H., author. | Wessels, David, author. Title: Valuation : measuring and managing the value of companies / McKinsey & Company, Tim Koller, Marc Goedhart, David Wessels. Description: Seventh edition. | Hoboken, New Jersey: Wiley, [2020] | Series: Wiley finance | First edition entered under: Copeland, Thomas E. Identifiers: LCCN 2020013692 (print) | LCCN 2020013693 (ebook) | ISBN 978-1-119-61088-5 (Hardcover) | ISBN 978-1-119-61087-8 (ePDF) | ISBN 978-1-119-61092-2 (ePub) | ISBN 978-1-119-61186-8 (University Edition) | ISBN 978-1-119-61246-9 (Cloth edition with DCF Model Download) | ISBN 978-1-119-61181-3 (Workbook) | ISBN 978-1-119-61086-1 (DCF Model Download) Subjects: LCSH: Corporations—Valuation—Handbooks, manuals, etc. Classification: LCC HG4028.V3 C67 2020 (print) | LCC HG4028.V3 (ebook) | DDC 658.15—dc23 LC record available at https://lccn.loc.gov/2020013692 LC ebook record available at https://lccn.loc.gov/2020013693 Printed in the United States of America 10  9  8  7  6  5  4  3  2  1 v Contents About the Authors      ix Preface      xi Acknowledgments      xv Part One  Foundations of Value 1  Why Value Value?      3 2  Finance in a Nutshell      17 3  Fundamental Principles of Value Creation      27 4  Risk and the Cost of Capital      55 5  The Alchemy of Stock Market Performance      69 6  Valuation of ESG and Digital Initiatives      83 7  The Stock Market Is Smarter Than You Think      99 8  Return on Invested Capital      127 9  Growth      155 Part Two  Core Valuation Techniques 10  Frameworks for Valuation      177 11  Reorganizing the Financial Statements      205 12  Analyzing Performance      239 13  Forecasting Performance      259