Case Study 3: Estimating the Cost of Capital 1. Currently Teletech Corporation (TC) uses a single hurdle rate for both their Telecommunications Services (TS) and Products and Services (P&S) divisions. This hurdle rate obtained by an estimate of TC Weighted Average Cost of Capital (WACC)‚ which is calculated at 9.3%. When analyzing critically at this point‚ TS is underperforming with a return on capital (ROC) of 9.1%‚ whereas‚ P&S segment is well over the required rate of return as it is gaining
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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)
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TELETECH CORPORATION‚ 1996 Raiders Dials Teletech Wake-up Call Needed Says Investor New York (AP)---The reclusive billionaire Victor Yossarian has acquired a 10 percent stake in Teletech Corporation and has demanded two seats on the firm’s board of directors. The purchase was revealed yesterday in a filing with the Securities and Exchange Commission‚ and separately in a letter to Teletech’s CEO‚ Maxwell Harper. “The firm is misusing its resources and not earning an
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Summary: The Teletech Corporation is a U.S company that provides integrated information movement and management. It has two main business divisions‚ which are The Telecommunication Services‚ and The Products and Systems. In Telecommunication Services division‚ it primarily provided many kinds of phone service to business and residential customers. In fact‚ it performed a network for 7 million customer lines throughout Southwest and Midwest. The division archived an increasing average rate of 3% on revenue
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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
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1. How does Teletech currently use the hurdle rate? Teletech currently uses the hurdle rate in the assessment of the firm’s economic profit and NPV. The rate is based on an estimate of Teletech’s WACC. Currently‚ the hurdle rate for Teletech is 10.407%‚ using data in Figure 1. The case rounds this number to 10.41% 2. What are the segment WACCs for Teletech? What assumptions do you have to make to do these calculations? Using the data in Figure 1‚ we can calculate the WACC for the
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Teletech has two business segments‚ Telecommunications Services and Products and Systems unit‚ for the last couple of months senior management at Teletech Corporation had been discussing returns. However‚ only until they received the letter from Victor Yossarian did they decide to spin into action and review the company’s returns‚ the hurdle rate that was being used company wise and not by business segments‚ the annual capital budget situation‚ the review of new possible policies‚ and finally they
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Statement of Problem Teletech Corporation’s CFO‚ Margaret Weston needs to decide three things. (1) What are the appropriate hurdle rates for each segment of their business? (2) Is the Products and Systems segment underperforming? And (3) How should Teletech respond to the raider Victor Yossarian? Facts and Assumptions Teletech Corporation has two distinct business segments‚ the more established Telecommunications Services segment‚ and the recently added Products and Systems segment. These two
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Teletech Corporation 1. What is a hurdle rate? How do you use it in a project evaluation? Hurdle rate is the minimum amount of return on a project the company is willing to accept before starting a project. It is used in project evaluation to evaluate the amount of return on the project. A common method for evaluating the hurdle rate is apply the discounted cash flow method to the project‚ like net present value. 2. How does Teletech Corporation currently use the hurdle rate? They used
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Case 15 Version 2.1 Teletech Corporation‚ 1996 Teaching Note Synopsis and Objectives In January 1996‚ the chief financial officer of this telecommunications company must fashion a response to a raider who claims that a major business segment of this company should be sold because it is not earning a satisfactory rate of return. The case recounts the debate within the company over the use of a single hurdle rate to evaluate all segments of the company versus a riskadjusted hurdle-rate
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