Mathematics and Single Hurdle Rate
Teletech Case 15
1. How does Teletech Corporation currently use the hurdle rate?
Teletech Corporation currently uses a single hurdle rate for both of their divisions. The divisions are Telecommunications Services and Products and Services. They use the hurdle rate based on the cost of capital which is a rough estimate of the Teletech’s WACC. They calculate it at 9.3% based on the cost of capital, beta, and WACC.
2. Please estimate the segments WACCs for Teletech (see worksheet Exhibit 1). As you do this, carefully note the points of judgment in the calculation.
3. Interpret Rick Phillips graph (Figure 2).
How does the choice of constant versus risk-adjusted hurdle rates affect the evaluation of Teletech’s resource-allocation strategy?
The costs of different forms of capital will all remain the same if each segment of Teletech had a different hurdle rate. The Telecommunications Services earns up to 9% on capital on a risk-adjusted rate. This is very profitable but the constant hurdle rate is not. For Products and services is opposite, not profitable on the risk-adjusted rate but very profitable for the constant hurdle rate.
4. Do you agree, “all money is green”? What are the implications of that view? What are the arguments in favor and against it?
I agree that all money is green. In order to create economic value, all the segments in the business should be performing slightly above the hurdle rate. Each segment could be viewed completely different, and more independently, but this could ultimately make firms under or over invest in other divisions.
5. Is Buono right that management would destroy value if all the firm’s assets were redeployed into only the telecommunications business segment? Why or why not? Please prepare a numerical example to support your view.
6. Has products and Systems destroyed value? What evidence or illustrations can you give to support your opinion?
7. What should Teletech say in response to
1. How does Teletech Corporation currently use the hurdle rate?
Teletech Corporation currently uses a single hurdle rate for both of their divisions. The divisions are Telecommunications Services and Products and Services. They use the hurdle rate based on the cost of capital which is a rough estimate of the Teletech’s WACC. They calculate it at 9.3% based on the cost of capital, beta, and WACC.
2. Please estimate the segments WACCs for Teletech (see worksheet Exhibit 1). As you do this, carefully note the points of judgment in the calculation.
3. Interpret Rick Phillips graph (Figure 2).
How does the choice of constant versus risk-adjusted hurdle rates affect the evaluation of Teletech’s resource-allocation strategy?
The costs of different forms of capital will all remain the same if each segment of Teletech had a different hurdle rate. The Telecommunications Services earns up to 9% on capital on a risk-adjusted rate. This is very profitable but the constant hurdle rate is not. For Products and services is opposite, not profitable on the risk-adjusted rate but very profitable for the constant hurdle rate.
4. Do you agree, “all money is green”? What are the implications of that view? What are the arguments in favor and against it?
I agree that all money is green. In order to create economic value, all the segments in the business should be performing slightly above the hurdle rate. Each segment could be viewed completely different, and more independently, but this could ultimately make firms under or over invest in other divisions.
5. Is Buono right that management would destroy value if all the firm’s assets were redeployed into only the telecommunications business segment? Why or why not? Please prepare a numerical example to support your view.
6. Has products and Systems destroyed value? What evidence or illustrations can you give to support your opinion?
7. What should Teletech say in response to