Division 3 Financial ratios

The LECG report agrees with our point of view that CAPM is the right instrument to assess the ex-ante cost of capital. Moreover, the report does not provide any argument to rebut the use of the ROCE as a proxy for the WACC. Therefore, it is not necessary to repeat the reasoning already set out in the previous note. However, it may still be worth recalling why the ROCE is the most appropriate ratio. Since the economic profitability of a company is measured ex-post by the difference between the return on capital employed and the cost of capital, then intuitively, if one were to construct a benchmark based on past data of competitors in order to determine the minimum return required by investors, then the appropriate proxy would be the average industry ROCE.