Summary
McKinsey Value - Summary for the course Finance @Nyenrode
- Course
- Institution
- Book
Summary of the book Value by Mckinsey
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
More summaries for
-
Managerial Finance - two study books
Seller
Follow
ferrymolenaar
Reviews received
Content preview
Class1:CH 1: Why value Value?
When people invest, they expect the value of their investment to increase by an amount that
sufficiently compensates them for the risk they took, as well as for the time value of their
money.
Why the four principles or cornerstones:
o Applying these principles, executives can figure out the value-creating answers to most
corporate finance questions, such as which business strategy to pursue, whether to
undertake a proposed acquisition, or whether to repurchase shares.
The first and guiding cornerstone (core of value) is that companies create value by investing
capital from investors to generate future cash flows at rates of return exceeding the cost of that
capital (that is, the rate investors require to be paid for the use of their capital- ROIC).
o The faster companies can grow their revenues and deploy more capital at attractive
rates of return, the more value they create. In short, the combination of growth and
return on invested capital (ROIC) drives value and value creation
o Companies with high returns on capital -> improvements in growth create value
o Companies with low returns on capital -> improvements in ROIC create value
The second cornerstone (conservation value): Value is created for shareholders when
companies generate higher cash flows, not by rearranging investors’ claims on those cash flows.
o Changing the ownership of claims to the cash flows does not change the total available
cash flows;
The third cornerstone (the expectations treadmill) is that a company’s performance in the stock
market is driven by changes in the stock market’s expectations, not just the company’s actual
performance (growth, ROIC, and resulting cash flow).
o the higher the stock market’s expectations for a company’s share price become => the
better a company has to perform just to keep up.
The fourth cornerstone (the best owner) is that the value of a business depends on who is
managing it and what strategy they pursue.
o different owners will generate different cash flows for a given business based on their
unique abilities to add value.
o a business has a given value only relative to who owns and operates it
Consequences of NOT valuing value:
o Internet-bubble: misapplication of increasing returns on scale;
o Financial crisis in 2007: banks and investors forgot the conservation-of-value principle,
they took on a level of risk that was unsustainable:
participants in the securitized mortgage market assumed that securitizing risky
home loans made them more valuable because it reduced the risk of the
assets—but this violates the conservation of value rule.
Everyone were believing that using leverage to make an investment in itself
creates value. It doesn’t because, according to the conservation-of-value
principle, leverage doesn’t increase the cash flows from an investment.
Advantages of valuing value
o Employee stakeholders: 1. Create jobs; 2. Retaining best employees through good offers
o Positive correlation between investments in R&D and long term shareholders return;
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller ferrymolenaar. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $3.25. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
62890 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now