Valuation Workbook

Step-by-Step Exercises and Tests to Help You Master Valuation

• Publisher: Wiley
• Year: 2020
• ISBN:
  9781119611820
• Edition: 7
• Topic: Business
• Subtopic: Valuation
• Index: Business

A vital companion to the bestselling guide to corporate valuation Valuation Workbook, 7th Edition is the ideal companion to McKinsey's Valuation, helping you get a handle on difficult concepts and calculations before using them in the real world. This workbook reviews all things valuation, 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 the latest edition of Valuation, this workbook is an invaluable learning tool for students and professionals alike and an essential part of the McKinsey Valuation suite.

Part One
Questions

1
Why Value Value?

The chief measures for judging a company are its ability to create value for its shareholders and the amount of total value it creates. Corporations that create value in the long term tend to increase the welfare of shareholders and employees as well as improve customer satisfaction; furthermore, they tend to behave more responsibly as corporate entities. Ignoring the importance of value creation not only hurts the company but leads to detrimental results such as market bubbles.

Value creation occurs when a company generates cash flows at rates of return that exceed the cost of capital. Accomplishing this goal usually requires that the company have a competitive advantage. Activities such as leverage and accounting changes do not create value. Frequently, managers shortsightedly emphasize earnings per share (EPS); in fact, a poll of managers found that most managers would reduce discretionary value‐creating activities such as research and development (R&D) in order to meet short‐term earnings targets. One method to meet earnings targets is to cut costs, which may have short‐term benefits but can have long‐run detrimental effects.

1. Data from both Europe and the United States found that companies that created the most shareholder value showed ____________ employment growth.
2. The _______________ in the late 1990s, and the ___________ in 2007–08, arose largely because companies and banks focused on ___________ over ____________.
3. Maximizing current share price is not equivalent to maximizing long‐term value because ____________.
4. Discretionary expenses that managers can slash in order to pump up short‐term profits include ____________.
5. During the Internet boom of the late 1990s, many firms lost sight of value creation principles by blindly pursuing ____________ without ____________.
6. The empirical evidence shows that the link between the value created by the acquisition of another company and earnings per share (EPS):
   1. Is strong and positive.
   2. Does not exist.
   3. Is weak and negative.
   4. Is strong and negative.
7. Paying attention to which of the following tends to lead to a company creating long‐term value for shareholders?
   1. Cash flow.
   2. Earnings per share.
   3. Growth.
   4. Return on invested capital.
      1. I and II only.
      2. II and III only.
      3. II, III, and IV only.
      4. I, III, and IV only.
8. A firm that grows rapidly will:
   1. Always create value.
   2. Create value if the return on invested capital (ROIC) is greater than the cost of obtaining funds.
   3. Create value if the return on invested capital (ROIC) is less than the cost of obtaining funds.
   4. Create value if the firm increases market share.
9. In order to create long‐term value, companies must:
   1. Focus on keeping costs at a minimum.
   2. Find the optimal debt‐to‐equity ratio.
   3. Seek and exploit new sources of competitive advantage.
   4. Monitor and follow macroeconomic trends.
10. Focus on short‐term results by banks was a contributing factor to the financial crisis of 2007–08.
    1. True
    2. False

2
Finance in a Nutshell

Companies create value when they earn a return on invested capital (ROIC) greater than their opportunity cost of capital. If the ROIC is at or below the cost of capital, growth may not create value. Companies should aim to find the combination of growth and ROIC that drives the highest discounted value of their cash flows. In so doing, they should consider that performance in the stock market may differ from intrinsic value creation, generally as a result of changes in investors' expectations.

To illustrate how value creation works, this chapter follows a company from its early years through going public. Throughout the discussion, attention is given to key measures of performance, such as ROIC, growth, and company value based on discounted cash flow (DCF). Five core ideas around value creation ...