Teletech Case Study

1231 Words Oct 7th, 2014 5 Pages
CASE STUDIES IN FINANCE
CASE 3:
TELETECH CORPORATION 2005

Q1. Teletech has two divisions- Telecommunications and Products & Services. For the purpose of investment and performance analysis at the firm, there is an applied hurdle rate of 9.30% for both divisions. Based on the firms’ WACC, this rate represents the cost of capital, and essentially, the opportunity cost of money. Teletech Corporation uses this hurdle rate to assess the performance of its two divisions; however there is argument whether this hurdle rate is ideal as it is not adjusted to risk .
Q2. Exhibit 1

Corporate
Telecommunications
Services
Products
and Systems
MV asset weights
100%
75%
25.00%
Bond rating
A-/BBB+
A
BB
Pretax cost of debt
5.88%
…show more content…
The argument against this comes from Mr Phillips, who believes that all information provided to investors should be accurately evaluated. He states that if the higher costs for the Products and Systems division is ignored, then the Telecommunications division will eventually starve for capital and all funds would be pushed into the Products and Services division. This is why it is beneficial for both the company and investors to use a risk-adjusted hurdle rate.

Q5. Teletech ($b)
Telecommunications ($b)
Products and Services ($b)
Capital
16
16
16
Allocation
.75(telecom)/.25(P&S)
1
1

ROC(%)
9.58
9.1
11
NOPAT
1.53
1.46
1.76
WACC
9.30%
8.41%
11.86%

Value of Firm
16.45
17.36
14.84

Helen Buono is mistaken in believing that the management would destroy value by only investing in the telecommunications division. Above we can see the value of the individual divisions against the value of Teletech. The telecommunications division alone would have increased the firms wealth if they had not expanded into P&S. Victor Yossarian is correct to state that ‘the firm is misusing its’ resources’ and not earning the return that it could. The P&S division has a high WACC which is bringing down its return. If Teletech was to abandon its entry into P&S, the firm would benefit in the long run.
6. The Product and Systems within Teletech has an overall value of $14.84b, where Telecommunications has

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