Valuation Workbook: Step–by–Step Exercises and Tests to Help You Master Valuation

The Ideal Companion to Valuation, Sixth Edition

Valuation Workbook is the ideal companion to McKinsey′s Valuation, Sixth Edition, helping you build intuition and understanding of difficult concepts and calculations before using them in the real world. This workbook reviews valuation concepts and techniques from the ground up, with chapter–by–chapter summaries and comprehensive questions and answers that allow you to test your knowledge and skills. Useful both in the classroom and for self–study, this must–have guide is essential for reviewing and applying the renowned McKinsey & Company approach to valuation and reinforces the major topics discussed in detail in the book. Fully updated to align with Valuation, Sixth Edition, this workbook is an invaluable learning tool for students and professionals alike.

Valuation has become central to corporate financial strategy, and practitioners must be exceptional at every aspect of the role. There is no room for weak points, and excellence is mandatory. This workbook helps you practice, review, study, and test yourself until you are absolutely solid in every concept, every technique, and every aspect of valuation as demanded in today′s economy.

Master value creation, value metrics, M&A, joint ventures, and more Analyze historical information, forecast performance, and analyze results Estimate the cost of capital, continuing value, and other vital calculations essential to valuation Test your understanding before putting it to work in the real world

Designed specifically to reinforce the material presented in the book, this workbook provides independent learners with the opportunity to try their hand at critical valuation skills, and helps students master the material so they can enter the job market ready to perform. For financial professionals and students seeking deep, comprehensive understanding, Valuation Workbook, Sixth Edition, is an essential self–study companion to the main text.

About the Authors ix

Introduction xi

Part One Questions

1 WhyValueValue? 3

2 Fundamental Principles of Value Creation 5

3 Conservation of Value and the Role of Risk 9

4 The Alchemy of Stock Market Performance 11

5 The Stock Market Is Smarter Than You Think 15

6 Return on Invested Capital 21

7 Growth 25

8 Frameworks for Valuation 29

9 Reorganizing the Financial Statements 33

10 Analyzing Performance 37

11 Forecasting Performance 41

12 Estimating Continuing Value 45

13 Estimating the Cost of Capital 49

14 Moving from Enterprise Value to Value per Share 53

15 Analyzing the Results 57

16 Using Multiples 61

17 Valuing by Parts 65

18 Taxes 69

19 Nonoperating Items, Provisions, and Reserves 73

20 Leases and Retirement Obligations 77

21 Alternative Measures of Return on Capital 81

22 Inflation 85

23 Cross–Border Valuation 89

24 Case Study: Heineken 93

25 Corporate Portfolio Strategy 99

26 Performance Management 103

27 Mergers and Acquisitions 107

28 Divestitures 113

29 Capital Structure, Dividends, and Share Repurchases 117

30 Investor Communications 121

31 Emerging Markets 125

32 Valuing High–Growth Companies 127

33 Cyclical Companies 129

34 Banks 133

35 Flexibility 137

Part Two Solutions

1 Why Value Value? 143

2 Fundamental Principles of Value Creation 145

3 Conservation of Value and the Role of Risk 147

4 The Alchemy of Stock Market Performance 149

5 The Stock Market Is Smarter Than You Think 151

6 Return on Invested Capital 153

7 Growth 155

8 Frameworks for Valuation 157

9 Reorganizing the Financial Statements 159

10 Analyzing Performance 161

11 Forecasting Performance 163

12 Estimating Continuing Value 167

13 Estimating the Cost of Capital 169

14 Moving from Enterprise Value to Value per Share 171

15 Analyzing the Results 173

16 Using Multiples 175

17 Valuing by Parts 177

18 Taxes 179

19 Nonoperating Items, Provisions, and Reserves 181

20 Leases and Retirement Obligations 185

21 Alternative Measures of Return on Capital 189

22 Inflation 191

23 Cross–Border Valuation 195

24 Case Study: Heineken 197

25 Corporate Portfolio Strategy 203

26 Performance Management 205

27 Mergers and Acquisitions 207

28 Divestitures 209

29 Capital Structure, Dividends, and Share Repurchases 211

30 Investor Communications 215

31 Emerging Markets 219

32 Valuing High–Growth Companies 221

33 Cyclical Companies 223

34 Banks 225

35 Flexibility 229

McKINSEY & COMPANY is a global management–consulting firm that serves across a wide range of industries and functions.

TIM KOLLER is a partner in McKinsey′s New York office, where he leads a global team of corporate–finance expert consultants.

MARC GOEDHART is a senior expert in McKinsey′s Amsterdam office and leads the firm′s Corporate Performance Center in Europe.

DAVID WESSELS is an adjunct professor of finance at the Wharton School of the University of Pennsylvania.

MICHAEL CICHELLO is a faculty member at the McDonough School of Business at Georgetown University.