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Unformatted text preview: McKinsey & Company, Q&A with Tim Koller and Marc Goedhart 1 Q&A with Tim Koller and Marc Goedhart on the new edition of Valuation for McKinsey.com The fourth edition of Valuation: Measuring and Managing the Value of Companies comes out in May. So far, the first three editions have sold a total of more than 400,000 copies. Investment banks, private equity firms, management consultancies, and more than 200 universities around the world all use the book, and Harvard, Wharton, University of Chicago, MIT, Northwestern, Yale and INSEAD all teach courses from it. Authors Tim Koller and Marc Goedhart answer questions on what makes Valuation the must-read in corporate finance. What is Valuation about? Essentially, its about how to create shareholder value, which is what makes companies thrive. It shows executives and corporate finance practitioners how to value companies using the discounted cash flow (DCF) approach and applying that information to make wiser business and investment decisions , such as those involving corporate portfolio strategy, acquisitions, or performance management. Executives must not only have a theoretical understanding of value creation, but must be able to create tangible links between their strategies and value creation. This means, for example, focusing less on recent financial performance and more on what they are doing to nurture a healthy company that can create value over the longer term. Arent CEOs more worried about next quarters results than the long term? Some are, but they shouldnt be. In spite of popular belief, the stock market is not overly concerned with the next quarters earnings. Research shows that earnings surprises explain less than 2 percent of share price changes around announcements. We have found that when share prices react negatively to earnings announcements, this is driven by changes in long-term not just short- term earnings expectations. Expectations of future performance are the main driver of stock prices. In almost all industry sectors, up to 80 percent of the stock market value is attributable to expectations about cash flows beyond the next 3 years. These longer-term expectations are driven by investor judgements of company growth plans and their long-term profitability. What should CEOs worry about instead? McKinsey & Company, Q&A with Tim Koller and Marc Goedhart 2 Of course, some analysts and investors will always clamor for short-term performance from companies. But the techniques described in the book help managers to look after their companies overall health, by which we mean their capacity to sustain strong performance, quarter after quarter, over the long term. capacity to sustain strong performance, quarter after quarter, over the long term....
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This note was uploaded on 02/21/2012 for the course ACT 492 taught by Professor Ngo during the Fall '11 term at Colorado.
- Fall '11