Teletech 2005

I do not think it is proper. Since hurdle rate is the key factor to determine whether we should accept a project, it is concerned with a specific investment opportunity belonging to a division. As we can see in Table 1, each of Midland`s divisions had its own target debt ratio. Those

This view implies that a single hurdle rate may deprive an under profitable division of investments in order to channel more funds into a more profitable division. While this is sound logic, certain situation exist where projects will go unfunded that do create value to the company.

Midland should not rely on a single corporate hurdle rate for evaluating investment opportunities across all divisions because each division is subject to fundamentally different forces such as political volatility, and high future expenditures. For example, R&E is expected to have capital expenditures in excess of $8 billion over the years 2007 and 2008 while worldwide refining capabilities are expected to decrease leading to possible investments in this division of Midland. The Exploration and Production division faces an entirely different set of challenges as oil reserves become more difficult to reach as in the case of arctic and deep water drilling operations, and consequently more expensive to exploit. In addition, political instability has become increasingly prevalent in investment considerations as oil production in areas such as the Middle East and Africa have grown. Civil and political upheaval in these regions threatens disruption of oil production and lead to greater volatility of prices (pg.2).

At the new WACC of 19%, the home appliance and agricultural machinery projects are valued based on their inherent levels of risk. The beta of the industry average home appliance project is 0.95, whereas the beta for the industry average agricultural machine project is calculated as 0.88. CAPM was then employed to find the cost of capital of each project. The cost of capital for the home appliance and agricultural machinery projects were found to be 10.4% and 9.92%, respectively (Appendix B). This analysis allows Star Company to allocate funds to projects that create returns greater than the industry cost of capital for each specific project.

The future of the telecommunication industry is an exciting future. No longer can these companies depend on telephone service plans to maintain profit. Each company needs to find other avenues, packages and services that can be sold to existing customers while attracting new customers. The companies

Hurdle rates, the weighted cost of capital that projected cash flows must exceed for initiatives to be considered, vary within Marriott Corporations due to their unique industry risk levels and capital structures. They use this number to determine which projects to accept, to adjust the rate at which the firm grows and as a measure for compensation within each business area, and as incentive compensation.

Art Marks should vote to make an investment in Telco Exchange because the company possesses many of the components which could make it a potential 67 million dollar company (from our valuation by DCF method using WACC -Appendix A). Telco has a product that solves large company high cost issues revolving around telecom equipment and telecom services (makes around $250,000 per software licensing deal). They have been profitable in 2002 and the potential to have a revenue of a 50 million annual revenue in four years time. They have

Although, it is true that lower hurdle rates would translate into high growth projects, but including it in Manager’s compensation plan might lead to agency problem where managers may try to manipulate the hurdle rates in order to get the projects through and make money.

A key factor in determining a project's viability is its cost of capital [WACC]. The estimation of Boeing's WACC must be consistent with the overall valuation approach and the definition of cash flows to be discounted. Note that this process is a forward looking focus and is laden with uncertainty. It is how the assumptions are modeled that many costly mistakes can be made. While finding a rate of return for an individual project, it is important to remember that WACC is only appropriate for an individual project.

Theoretically, with the results of the P / E multiples, the company's value or performance can be determined by multiplying the company's profit with this ratio upon the target company. Phelps’s P/E multiples have increased from the previous quarter in which attract companies’ attention for acquisition. Higher P/E means PD use stock as consideration more frequently. In addition to positive EV/Sales, it shows that Phelps has more debt rather than cash. However, the growth of Phelps’ P/E targets a good prospect in future earnings. For ROE, as higher the return is better so, with this ROE, FCX can use it to compare the other companies.

• TelePizza has always set demanding growth targets and achieved them, which also gave the company a high valuation at the stock market. Under all of

Headquartered in Texas, Teletech Corporation operates under two main business segments: the Telecommunications Services segment, providing various telephone services to business and residential customers and the Products & Systems segment, which manufactures computing and telecommunications equipment. In late 2005, the Securities & Exchange Commission revealed that billionaire Victor Yossarian acquired a 10% stake in Teletech and demanded two seats on the board of directors. He felt that the firm was misusing their resources and not earning a sufficient return. He stated that Teletech should sell off its Product & Systems segment and focus on creating value for the company’s shareholders. A detailed analysis will reveal

Looking at the graph above, when Teletech Corp. uses the constant hurdle rate, Telecommunications services which earns 9.1% on capital is underneath of the company’s hurdle rate. Moreover, the P&S which promises to earn 11% on capital is above the company’s hurdle rate. However, the result may be reversed by looking at the graph with adjusted risk hurdle rates. It is clear that company is doing better than they should in the telecommunication segment, because they are getting higher return in comparison to the risk they are taking. On the other hand, P&S segment is not doing as well as it should, because return is getting lower than the risk taken by the company. That is to say, constant and risk-adjusted hurdle rate lead to the different results when Teletech Corp. evaluated its ROR. Implications that company are facing in this strategy are that they are going with the constant hurdle rate for all of its segments, which is not viable. For this reason the company is not adding the extra value of the NPV that these segments are producing and resulting in a lower value for the shareholders.

One of the problems with divisional rates, as the advocates for the single rate contend, is that the categories suggested were not helpful in grouping projects by their risk. Although the use of multiple divisional hurdle rates may capture the appropriate discount rate for most projects (given that most projects among the division carry similar characteristics), a more accurate determinant for evaluating projects within a division would be to use multiple discount rates based on individual projects. Assuming that all projects within a division carry the same risk may potentially lead to projects being accepted or rejected in an inappropriate manner. Similar to the case in which one corporate discount rate is used, projects that are riskier than average would be mistakenly accepted and low risk project would be rejected. A situation in which this would occur would be in the volatile tanker industry, which proved to be devastating for many companies in the industry. Under divisional rates Pioneer would evaluate tanker investments under the transportation division, which has a much lower discount rate than is realistic for high-risk tanker investments.

One of the problems with divisional rates, as the advocates for the single rate contend, is that the categories suggested were not helpful in grouping projects by their risk. Although the use of multiple divisional hurdle rates may capture the appropriate discount rate for most projects (given that most projects among the division carry similar characteristics), a more accurate determinant for evaluating projects within a division would be to use multiple discount rates based on individual projects. Assuming that all projects within a division carry the same risk may potentially lead to projects being accepted or rejected in an inappropriate manner. Similar to the case in which one corporate discount rate is used, projects that are riskier than average would be mistakenly accepted and low risk project would be rejected. A situation in which this would occur would be in the volatile tanker industry, which proved to be devastating for many companies in the industry. Under divisional rates Pioneer would evaluate tanker investments under the transportation division, which has a much lower discount rate than is realistic for high-risk tanker investments.