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by Marc Goedhart, Tim Koller, McKinsey & Company, David Wessels
Valuation: Measuring and Managing the Value of Companies, Fifth Edition
Title Page
Copyright Page
About the Authors
Preface
WHY THIS BOOK
STRUCTURE OF THE BOOK
WHAT’S NEW ABOUT THE FIFTH EDITION
VALUATION SPREADSHEET
Acknowledgments
Part One - Foundations of Value
Chapter 1 - Why Value Value?
CONSEQUENCES OF FORGETTING TO VALUE VALUE
BENEFITS OF FOCUSING ON LONG-TERM VALUE
CHALLENGES OF FOCUSING ON LONG-TERM VALUE
Chapter 2 - Fundamental Principles of Value Creation
GROWTH AND ROIC: DRIVERS OF VALUE
CONSERVATION OF VALUE
RISK AND VALUE CREATION
THE MATH OF VALUE CREATION
SUMMARY
Chapter 3 - The Expectations Treadmill
WHY SHAREHOLDER EXPECTATIONS BECOME A TREADMILL
REAL-WORLD EFFECTS OF THE EXPECTATIONS TREADMILL
DECOMPOSING TRS
UNDERSTANDING EXPECTATIONS
MANAGERIAL IMPLICATIONS
Chapter 4 - Return on Invested Capital
DRIVERS OF RETURN ON INVESTED CAPITAL
COMPETITIVE ADVANTAGE
SUSTAINABILITY OF RETURN ON INVESTED CAPITAL
EMPIRICAL ANALYSIS OF RETURNS ON INVESTED CAPITAL
ROIC Trends
ROIC by Industry and Company Size
SUMMARY
Chapter 5 - Growth
DRIVERS OF REVENUE GROWTH
GROWTH AND VALUE CREATION
DIFFICULTY OF SUSTAINING GROWTH
EMPIRICAL ANALYSIS OF CORPORATE GROWTH
SUMMARY
Part Two - Core Valuation Techniques
Chapter 6 - Frameworks for Valuation
ENTERPRISE DISCOUNTED CASH FLOW MODEL
ECONOMIC-PROFIT-BASED VALUATION MODELS
ADJUSTED PRESENT VALUE MODEL
CAPITAL CASH FLOW MODEL
CASH-FLOW-TO-EQUITY VALUATION MODEL
OTHER APPROACHES TO DISCOUNTED CASH FLOW
ALTERNATIVES TO DISCOUNTED CASH FLOW
SUMMARY
Chapter 7 - Reorganizing the Financial Statements
REORGANIZING THE ACCOUNTING STATEMENTS: KEY CONCEPTS
REORGANIZING THE ACCOUNTING STATEMENTS: IN PRACTICE
ADVANCED ANALYTICAL ISSUES
Chapter 8 - Analyzing Performance and Competitive Position
ANALYZING RETURNS ON INVESTED CAPITAL
ANALYZING REVENUE GROWTH
CREDIT HEALTH AND CAPITAL STRUCTURE
ALTERNATIVES TO ROIC
GENERAL CONSIDERATIONS
Chapter 9 - Forecasting Performance
DETERMINE LENGTH AND DETAIL OF THE FORECAST
COMPONENTS OF A GOOD MODEL
MECHANICS OF FORECASTING
ADDITIONAL ISSUES
Chapter 10 - Estimating Continuing Value
RECOMMENDED FORMULA FOR DCF VALUATION
RECOMMENDED FORMULA FOR ECONOMIC-PROFIT VALUATION
SUBTLETIES OF CONTINUING VALUE
COMMON PITFALLS
EVALUATING OTHER APPROACHES TO CONTINUING VALUE
ADVANCED FORMULAS FOR CONTINUING VALUE
Chapter 11 - Estimating the Cost of Capital
WEIGHTED AVERAGE COST OF CAPITAL
ESTIMATING THE COST OF EQUITY
ESTIMATING THE AFTER-TAX COST OF DEBT
USING TARGET WEIGHTS TO DETERMINE THE COST OF CAPITAL
COMPLEX CAPITAL STRUCTURES
Chapter 12 - Moving from Enterprise Value to Value per Share
VALUING NONOPERATING ASSETS
VALUING DEBT AND DEBT EQUIVALENTS
VALUING HYBRID SECURITIES AND MINORITY INTERESTS
ESTIMATING VALUE PER SHARE
Chapter 13 - Calculating and Interpreting Results
VERIFYING VALUATION RESULTS
SENSITIVITY ANALYSIS
CREATING SCENARIOS
VALUATION BY PARTS
THE ART OF VALUATION
Chapter 14 - Using Multiples to Triangulate Results
USING THE RIGHT MULTIPLE
CALCULATING THE MULTIPLE IN A CONSISTENT MANNER
USING THE RIGHT PEER GROUP
ALTERNATIVE MULTIPLES
SUMMARY
Part Three - Intrinsic Value and the Stock Market
Chapter 15 - Market Value Tracks Return on Invested Capital and Growth
STOCK MARKETS TRACK ECONOMIC FUNDAMENTALS
COMPANY VALUATION LEVELS TRACK RETURN ON INVESTED CAPITAL AND GROWTH
TOTAL RETURNS TO SHAREHOLDERS TRACK PERFORMANCE AGAINST EXPECTATIONS
SUMMARY
Chapter 16 - Markets Value Substance, Not Form
MANAGING EARNINGS: NOT WORTH THE EFFORT
ECONOMICS OF ACCOUNTING INFORMATION: NO MYSTERY TO THE MARKET
TECHNICAL TRADING FACTORS ARE IRRELEVANT FOR VALUE
SUMMARY
Chapter 17 - Emotions and Mispricing in the Market
EMOTIONS RARELY DRIVE STOCK MARKET VALUES
COMPANY MISPRICING: CARVE-OUTS AND DUAL LISTINGS
COMPANY MISPRICING: OVERREACTION AND UNDERREACTION, REVERSAL AND MOMENTUM
MARKET MISPRICING: BUBBLES AND BURSTS
SUMMARY
Chapter 18 - Investors and Managers in Efficient Markets
INVESTORS IN EFFICIENT MARKETS
MANAGERIAL IMPLICATIONS
Part Four - Managing for Value
Chapter 19 - Corporate Portfolio Strategy
WHAT MAKES AN OWNER THE BEST
THE BEST-OWNER LIFE CYCLE
CONSTANTLY EVOLVING PORTFOLIO OF BUSINESSES
CONSTRUCTING THE PORTFOLIO
THE MYTH OF DIVERSIFICATION
SUMMARY
Chapter 20 - Performance Management
CHOOSING THE RIGHT METRICS
ORGANIZATIONAL SUPPORT
SUMMARY
Chapter 21 - Mergers and Acquisitions
VALUE CREATION FRAMEWORK
EMPIRICAL RESULTS
ARCHETYPES FOR VALUE-CREATING ACQUISITIONS
MORE DIFFICULT STRATEGIES FOR CREATING VALUE FROM ACQUISITIONS
ESTIMATION OF OPERATING IMPROVEMENTS
HOW TO PAY: IN CASH OR IN STOCK?
FOCUS ON VALUE CREATION, NOT ACCOUNTING
SUMMARY
Chapter 22 - Creating Value through Divestitures
VALUE CREATION FROM DIVESTITURES
HOW TO APPROACH DIVESTITURES
DECIDING ON TRANSACTION TYPE
SUMMARY
Chapter 23 - Capital Structure
CAPITAL STRUCTURE AND VALUE CREATION
CREDIT RATINGS AND CAPITAL STRUCTURE
SHORT-TERM STEPS TO MANAGE CAPITAL STRUCTURE
DESIGNING A LONG-TERM CAPITAL STRUCTURE
CREATING VALUE FROM FINANCIAL ENGINEERING
SUMMARY
Chapter 24 - Investor Communications
INTRINSIC VALUE VERSUS MARKET VALUE
UNDERSTANDING THE INVESTOR BASE
COMMUNICATING TO INTRINSIC INVESTORS
SUMMARY
Part Five - Advanced Valuation Issues
Chapter 25 - Taxes
OPERATING TAXES ON THE REORGANIZED INCOME STATEMENT
CONVERTING OPERATING TAXES TO OPERATING CASH TAXES
DEFERRED TAXES ON THE REORGANIZED BALANCE SHEET
VALUING DEFERRED TAXES
Chapter 26 - Nonoperating Expenses, One-Time Charges, Reserves, and Provisions
NONOPERATING EXPENSES AND ONE-TIME CHARGES
PROVISIONS AND THEIR CORRESPONDING RESERVES
Chapter 27 - Leases, Pensions, and Other Obligations
OPERATING LEASES
SECURITIZED RECEIVABLES
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Chapter 28 - Capitalized Expenses
EXPENSING VERSUS CAPITALIZATION
PROCESS FOR CAPITALIZING R&D
ROIC AND FREE CASH FLOW WITH CAPITALIZED R&D
OTHER EXPENSES SUITABLE FOR CAPITALIZATION
Chapter 29 - Inflation
INFLATION LEADS TO LOWER VALUE CREATION
HISTORICAL ANALYSIS IN TIMES OF HIGH INFLATION
FINANCIAL PROJECTIONS IN REAL AND NOMINAL TERMS
SUMMARY
Chapter 30 - Foreign Currency
FORECASTING CASH FLOWS IN FOREIGN AND DOMESTIC CURRENCY
ESTIMATING THE COST OF CAPITAL IN FOREIGN CURRENCY
INCORPORATING FOREIGN-CURRENCY RISK IN VALUATIONS
USING TRANSLATED FOREIGN-CURRENCY FINANCIAL STATEMENTS
SUMMARY
Chapter 31 - Case Study: Heineken
INDUSTRY DEVELOPMENTS
REORGANIZING FINANCIAL STATEMENTS
ANALYZING HISTORICAL PERFORMANCE
FORECASTING PERFORMANCE
ESTIMATING COST OF CAPITAL
ESTIMATING CONTINUING VALUE
CALCULATING AND INTERPRETING RESULTS
Part Six - Special Situations
Chapter 32 - Valuing Flexibility
UNCERTAINTY, FLEXIBILITY, AND VALUE
CLASSIFYING FLEXIBILITY IN TERMS OF REAL OPTIONS
METHODS FOR VALUING FLEXIBILITY
FOUR-STEP PROCESS FOR VALUING FLEXIBILITY
REAL-OPTION VALUATION AND DECISION TREE ANALYSIS: A NUMERICAL EXAMPLE
SUMMARY
Chapter 33 - Valuation in Emerging Markets
HISTORICAL ANALYSIS
CREATING A CONSISTENT SET OF ECONOMIC ASSUMPTIONS
FORECASTING CASH FLOWS
INCORPORATING EMERGING-MARKET RISKS IN THE VALUATION
ESTIMATING COST OF CAPITAL IN EMERGING MARKETS
CALCULATING AND INTERPRETING RESULTS
SUMMARY
Chapter 34 - Valuing High-Growth Companies
VALUATION PROCESS FOR HIGH-GROWTH COMPANIES
UNCERTAINTY IS HERE TO STAY
SUMMARY
Chapter 35 - Valuing Cyclical Companies
SHARE PRICE BEHAVIOR
APPROACH TO VALUING CYCLICAL COMPANIES
IMPLICATIONS FOR MANAGING CYCLICAL COMPANIES
SUMMARY
Chapter 36 - Valuing Banks
ECONOMICS OF BANKING
PRINCIPLES OF BANK VALUATION
COMPLICATIONS IN BANK VALUATIONS
SUMMARY
APPENDIX A - Economic Profit and the Key Value Driver Formula
APPENDIX B - Discounted Economic Profit Equals Discounted Free Cash Flow
APPENDIX C - Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value
APPENDIX D - Levering and Unlevering the Cost of Equity
APPENDIX E - Leverage and the Price-to-Earnings Multiple
Index
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