Teletech Case Essay

984 Words Apr 21st, 2011 4 Pages
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 Telecom Services division and the Products and Systems division of Teletech. Telecom Services WACC is 10.404% while Products and Services WACC is 10.417%. Assumptions need to be made for the Cost of Equity. We used the corporate rate of 11.766%
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She refuses to allow risk to become a factor in the evaluation of value. Products and Systems is capturing an IRR of 12% because its segment is RISKIER. Would value be destroyed if all of the firm’s assets were in Telecom? Yes, if the Products and Systems segment continued to earn an IRR of 12%, compared to Telecom’s 9.8% and we only invested in Telecom. But with more risk, comes more volatility. Using Figure 3 we can see that the Products and Systems industry is more susceptible to changes in the market. An average Equity Beta of 1.55 tells us that the industry is more affected by market changes than Telecom’s Equity Beta of .84.

6. Has Products and Systems destroyed value? What evidence can you give to support your opinion?

Assuming that Rick Phillips’s chart of risk-adjusted hurdle rate is correct, Products and Systems is destroying value. Since the ROC of Products and Systems is below the hurdle rate for its level of risk, the company is inefficient in allocating its funds. The one hurdle rate is blind to risk. Its ROC should lay on or above the risk adjusted line.

7. What should Teletech say in response to Victor Yossarian?

Victor, you are right that Products and Services has destroyed value. We were aloof to the fact that risk should play an important part of value analysis. From this point moving forward, projects will be evaluated on a

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