Mackenzy Model for Co Valuation
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A Tutorial on the McKinsey Model for Valuation of Companies
L. Peter Jennergren
∗
Fourth revision, August 26, 2002
SSE/EFI Working Paper Series in Business Administration No. 1998:1
Abstract All steps of the McKinsey model are outlined. Essential steps are: calculation of free cash flow, forecasting of future accounting data (profit and loss accounts and balance sheets), and discounting of free cash flow. There is particular emphasis on forecasting those balance sheet items which relate to Property, Plant, and Equipment. There is an exemplifying valuation included (of a company called McKay), as an illustration. Key words: Valuation, free cash flow, discounting, accounting data JEL classification: G31, M41, C60
Stockholm School of Economics, Box 6501, S - 11383 Stockholm, Sweden. The author is indebted to Joakim Levin, Per Olsson, and Kenth Skogsvik for discussions and comments.
∗
1
1
Introduction
This tutorial explains all the steps of the McKinsey valuation model, also referred to as the discounted cash flow model and described in Tom Copeland, Tim Koller, and Jack Murrin: Valuation: Measuring and Managing the Value of Companies (Wiley, New York; 1st ed. 1990, 2nd ed. 1994, 3rd ed. 2000). The purpose is to enable the reader to set up a complete valuation model of his/her own, at least for a company with a simple structure (e. g., a company that does not consist of several business units and is not involved in extensive foreign operations). The discussion proceeds by means of an extended valuation example. The company that is subject to the valuation exercise is the McKay company. The McKay example in this tutorial is somewhat similar to the Preston example (concerning a trucking company) in Copeland et al. 1990, Copeland et al. 1994. However, certain simplifications have been made, for easier understanding of the model. In particular, the capital structure of McKay is composed only of equity and debt (i. e., no convertible bonds, etc.). The...
L. Peter Jennergren
∗
Fourth revision, August 26, 2002
SSE/EFI Working Paper Series in Business Administration No. 1998:1
Abstract All steps of the McKinsey model are outlined. Essential steps are: calculation of free cash flow, forecasting of future accounting data (profit and loss accounts and balance sheets), and discounting of free cash flow. There is particular emphasis on forecasting those balance sheet items which relate to Property, Plant, and Equipment. There is an exemplifying valuation included (of a company called McKay), as an illustration. Key words: Valuation, free cash flow, discounting, accounting data JEL classification: G31, M41, C60
Stockholm School of Economics, Box 6501, S - 11383 Stockholm, Sweden. The author is indebted to Joakim Levin, Per Olsson, and Kenth Skogsvik for discussions and comments.
∗
1
1
Introduction
This tutorial explains all the steps of the McKinsey valuation model, also referred to as the discounted cash flow model and described in Tom Copeland, Tim Koller, and Jack Murrin: Valuation: Measuring and Managing the Value of Companies (Wiley, New York; 1st ed. 1990, 2nd ed. 1994, 3rd ed. 2000). The purpose is to enable the reader to set up a complete valuation model of his/her own, at least for a company with a simple structure (e. g., a company that does not consist of several business units and is not involved in extensive foreign operations). The discussion proceeds by means of an extended valuation example. The company that is subject to the valuation exercise is the McKay company. The McKay example in this tutorial is somewhat similar to the Preston example (concerning a trucking company) in Copeland et al. 1990, Copeland et al. 1994. However, certain simplifications have been made, for easier understanding of the model. In particular, the capital structure of McKay is composed only of equity and debt (i. e., no convertible bonds, etc.). The...