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 a ROC of 11
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FENGYUAN LIU 15929173 TAO WANG 16348171 XU HAN 15930331 1. What is going right with this business? Based on analysis in EXHIBIT1&2‚ the revenue of Horniman Horticulture grows steady and strong. Revenue growth ratio rose from2.9% in 2002 to 15.5% in 2005‚ which was much higher than the benchmark. Gross profit in 2005 was $545‚400 which was much higher than $470‚500 in 2004. In 2005‚ the return on assets was 5.1%‚ which was nearly twice higher than benchmark. The return on capital
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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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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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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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2. TELETECH CORPORATION 1. How does Teletech Corporation currently use the hurdle rate? Currently Teletech uses a single hurdle rate for both their Telecommunications Services and Products and Services divisions. The hurdle rate is the cost of capital based on an estimate of the corporation’s WACC. 2. Please estimate the segment WACCs for Teletech (see the worksheet in case Exhibit 1). As you do this‚ carefully note the points of judgment in the calculation. Corporate Telecommunications
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Teletech Corporation‚ 2005 Kyle Fortin My recommendation for Teletech Corporation is to change from a constant hurdle rate to the use of two risk-adjusted hurdle rates‚ one for each segment. Teletech’s performance is evaluated based on economic profit calculations. Through this measure‚ the risk-adjusted hurdle rates return a higher amount of profit compared to a single corporate hurdle rate. Currently‚ the firm has been using 9.30% as their hurdle rate‚ and as a result the firm’s share prices
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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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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
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1. Teletech Corporation currently uses its hurdle rate to measure its economic profit and NPV. It is used to measure value creation‚ and providing information on each unit’s performance for investors. Teletech’s current practice of “one size fits all” hurdle rate is not the best practice because each division has its own risks and nature of operations. Therefore‚ each division’s profitability should be compared to that division’s own WACC. 2. See attachment 3. According to Rick Phillip’s
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