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 needed to do a concrete assessment of the Products and Systems segment to know if it was profitable on its own. This situation becomes even more critical when taking in consideration that the company plans to invest about $2 Billion in the next year on capital projects. Top management set up the hurdle rate at 9.30%, this rate is applied to all capital projects and it is use in the evaluation of the business units. Exhibit A breaks downs a partial financial status of each business segment; according to top management the firms prospective Return on Capital should be 9.58%. Exhibit A
| Telecommunications Service| Products and Systems|
ROC| 9.10%| 11.0%|
Book Value| $11.4 Billion| $4.6 Billion|
Market Value| 75%| 25%|
Growth| Revenue grew 3% in last 4 years| Sales grew 40% last year |
The approach to a long-term solution for Teletech Corporation required a new WACC calculation of each business segment and a final determination when it comes to using the current hurdle rate or a risk-adjusted hurdle rate. Also a review of Teletech’s value creation formula of economic profit used to make strategic decision about manager promotions, capital allocation, and incentive compensation. In addition to a review of the second value creation formula used for the review of capital investment proposals where the future investment is discounted to the net present value using the hurdle rate of 9.30%. In order to calculate the WACC or hurdle rate for each...