frameworks for valuation

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1、P1:OTA/XYZP2:ABCc06JWBT347/MckinseyJune4,201017:48PrinterName:Hamilton6FrameworksforValuationInPartOne,webuiltaconceptualframeworktoshowwhatdrivesvalue.Inbroadterms,acompanysvalueisdrivenbyitsabilitytoearnahealthyreturnoninvestedcapital(ROIC)andbyitsabilitytogrow.Healthyratesofreturnandgrowthresulti

2、nhighcashflows,theultimatesourceofvalue.PartTwooffersastep-by-stepguideforanalyzingandvaluingacompanyinpractice,includingtechnicaldetailsforproperlymeasuringandinterpretingthedriversofvalue.Amongthemanywaystovalueacompany(seeExhibit6.1foranoverview),wefocusparticularlyontwo:enterprisediscountedcashflo

3、w(DCF)anddiscountedeconomicprofit.Whenappliedcorrectly,bothvaluationmethodsyieldthesameresults;however,eachmodelhascertainbenefitsinpractice.EnterpriseDCFremainsafavoriteofpractitionersandacademicsbecauseitreliessolelyontheflowofcashinandoutofthecompany,ratherthanonaccounting-basedearnings.Thediscounte

4、deconomic-profitvaluationmodelisgaininginpopularitybecauseofitscloselinktoeconomictheoryandcompetitivestrategy.Economicprofithighlightswhetheracompanyisearningitscostofcapitalandhowitsfinancialperformanceisexpectedtochangeovertime.Giventhatthetwomethodsyieldidenticalresultsandhavedifferentbutcomplement

5、arybenefits,werecommendcreatingbothenterpriseDCFandeconomic-profitmodelswhenvaluingacompany.BoththeenterpriseDCFandeconomic-profitmodelsdiscountfuturein-comestreamsattheweightedaveragecostofcapital(WACC).WACC-basedmodelsworkbestwhenacompanymaintainsarelativelystabledebt-to-valueratio.Ifacompanysdebt-to

6、-valueratioisexpectedtochange,WACC-basedmodelscanstillyieldaccurateresultsbutaremoredifficulttoapply.Insuchcases,werecommendanalternativetoWACC-basedmodels:adjustedpresentvalue(APV).APVspecificallyforecastsandvaluesanycashflowsassociatedwithcapitalstructureseparately,ratherthanembeddingtheirvalueinthec

7、ostofcapital.Thechapteralsoincludesadiscussionofcapitalcashflowandequitycashflowvaluationmodels.Becausethesetwovaluationmodelsmixtogether103P1:OTA/XYZP2:ABCc06JWBT347/MckinseyJune4,201017:48PrinterName: