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Hi Matt,

Copeland adds excess cash, etc. to compute Investor Funds

That's correct but only after calculating invested capital which is what the ROIC is based on.

The cash should only be what's needed for operations. The whole goal of ROIC is to measure the returns on operations relative to the capital employed to generate them. The financing of those earnings is removed from the equation. The determination of what is excess and what is operational is a judgement call and you must use your best guess.

Note also there is a big difference between measuring the efficiency of operations and valuing the company. If total capital efficiency is important there is always return on assets. Further you can breakdown ROE to look at other efficiencies and leverage points like asset turnover or financial leverage. But these are only point in time measurements and don't take a multistage view of the company which a discounted cash flow forecast would.

Since Hewitt doesn't make his DCF methods available (at least until his next book :), I can only say that Copeland recommends the entity or FCFF model which seems to be inline with M* valuation methods. And the FCFF model works well with ROIC data points.

Don't know if that helps

Matthew
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