Profit and Corporate Hurdle Rate
Over the Hurdle
Executive Summary
Currently, Teletech Corp. is using a single corporate hurdle rate to evaluate its investment decisions in its products and systems segment as well as its telecommunications segment. Using only one hurdle rate doesn’t take into account the risk that the company faces within each segment. Investors demand higher returns for riskier investments. Victor Yossarian is concerned about the low returns for the high risk in the products and systems segment, this is why he wants to abandon this segment. Using two hurdle rates adjusts for the risk in each industry allows the company to adequately value each segment. Our analysis will show that by using two hurdle rates it will lower the cost of equity and WACC for the less risky telecommunications segment, while raising the cost of equity and WACC for the more risky products and systems segment. Lastly, our calculation of the economic profitability for each industry using the segmented hurdle rates will show that Teletech may be overvaluing its products and systems segment while undervaluing its telecommunications segment. This implies that Teletech should reallocate its capital in order to increase economic profitability .
Introduction
We will conduct an industry comparison analysis to show how the the company’s cost of borrowing and beta compares to its competitors. Next, we will explain why it is more beneficial for the company to use segmented hurdles rates rather than the corporate hurdle rate currently being used. We will then calculate a new hurdle rate and the economic profit for each division. Then, we will explain how capital restructuring can increase our profits for each segment. Lastly, we will address the concerns with the company’s recent performance and the future direction of the company.
Industry Comparable Analysis
Prior to any action, we will examine Teletech Corp’s market debt to capital and market debt to
Executive Summary
Currently, Teletech Corp. is using a single corporate hurdle rate to evaluate its investment decisions in its products and systems segment as well as its telecommunications segment. Using only one hurdle rate doesn’t take into account the risk that the company faces within each segment. Investors demand higher returns for riskier investments. Victor Yossarian is concerned about the low returns for the high risk in the products and systems segment, this is why he wants to abandon this segment. Using two hurdle rates adjusts for the risk in each industry allows the company to adequately value each segment. Our analysis will show that by using two hurdle rates it will lower the cost of equity and WACC for the less risky telecommunications segment, while raising the cost of equity and WACC for the more risky products and systems segment. Lastly, our calculation of the economic profitability for each industry using the segmented hurdle rates will show that Teletech may be overvaluing its products and systems segment while undervaluing its telecommunications segment. This implies that Teletech should reallocate its capital in order to increase economic profitability .
Introduction
We will conduct an industry comparison analysis to show how the the company’s cost of borrowing and beta compares to its competitors. Next, we will explain why it is more beneficial for the company to use segmented hurdles rates rather than the corporate hurdle rate currently being used. We will then calculate a new hurdle rate and the economic profit for each division. Then, we will explain how capital restructuring can increase our profits for each segment. Lastly, we will address the concerns with the company’s recent performance and the future direction of the company.
Industry Comparable Analysis
Prior to any action, we will examine Teletech Corp’s market debt to capital and market debt to