Teletech Case Solution
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 system. The tasks for the student are to resolve the debate, estimate weighted average costs of capital (WACCs) for the two business segments, and respond to the raider.
Suggestions for complementary cases:
“Nike Inc.” (case 13) gives an introductory exercise in the estimation of the cost of capital. “Coke vs. Pepsi, 2001” (case 14) offers the estimation of WACCs for two competitors and opportunities to reflect upon how business risk drives cost of capital.
“Phon-Tech Corp.” (UVA-F-1161) is a simplified version of “Teletech Corporation,
1996” (case 15), excluding consideration of levered beta and segment capital structures.
The case was prepared to serve as part of an introduction to estimating investors’ required rates of return. It would best follow one or two class sessions introducing techniques for estimating WACC. The numerical calculations required are light, though some of the subtleties about the use of risk-adjusted hurdle rates will require time for the novice to absorb.
The case can be used to pursue a variety of teaching objectives, including the following:
•
Extend risk-return (i.e., mean-variance) analysis to corporate finance
•
Survey classic arguments for and against the use of risk-adjusted hurdle rate systems
•
Assess the assumptions and limitations of risk-adjusted hurdle rates
•
Exercise the estimation of segment WACCs
This teaching note was prepared by Professor Robert F. Bruner. Casey Opitz assisted
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 system. The tasks for the student are to resolve the debate, estimate weighted average costs of capital (WACCs) for the two business segments, and respond to the raider.
Suggestions for complementary cases:
“Nike Inc.” (case 13) gives an introductory exercise in the estimation of the cost of capital. “Coke vs. Pepsi, 2001” (case 14) offers the estimation of WACCs for two competitors and opportunities to reflect upon how business risk drives cost of capital.
“Phon-Tech Corp.” (UVA-F-1161) is a simplified version of “Teletech Corporation,
1996” (case 15), excluding consideration of levered beta and segment capital structures.
The case was prepared to serve as part of an introduction to estimating investors’ required rates of return. It would best follow one or two class sessions introducing techniques for estimating WACC. The numerical calculations required are light, though some of the subtleties about the use of risk-adjusted hurdle rates will require time for the novice to absorb.
The case can be used to pursue a variety of teaching objectives, including the following:
•
Extend risk-return (i.e., mean-variance) analysis to corporate finance
•
Survey classic arguments for and against the use of risk-adjusted hurdle rate systems
•
Assess the assumptions and limitations of risk-adjusted hurdle rates
•
Exercise the estimation of segment WACCs
This teaching note was prepared by Professor Robert F. Bruner. Casey Opitz assisted