Weighted Average Cost of Capital and Single Hurdle Rate Essay

2. What are the segment WACCs for Teletech? What assumptions do you have to make to do these calculations?

Business risk evaluation – possible and moderate = medium business risk. The threat of new entrants and substitute products are very high, in addition to the high level of competition in the industry. Therefore, the business risk that MTI faces – losing customers due to lack of product differentiation, profit decrease due to increase in competition in the industry are likely possible to occur. In addition, the effects from new companies entering the industry will have a moderate effect on MTI’s revenue stream. As a conclusion, MTI faces medium business risk.

Our estimated cost of capital, 20.81%, is lower than Ricketts’ expected return, 30%-50%, thus the investment is worthy. However, it’s higher than other pessimistic members’ expected return, 10%-15%, making the decision more complex and requiring further valuation。

The purpose of this memo is to provide Target Corp. senior management with an evaluation of the company’s weighted average cost of capital (WACC). Since the 2010 financial information is not yet to be finalized, the analysis will use the most currently published financial data to evaluate each component of the WACC, including the company financial structure, cost of debt, and cost of equity.

Two managers attending an executive education course attempt to develop a cost of capital estimate for a leading telecommunications company, Telus The two managers are somewhat confused about the costs of various sources of capital, the calculation of the overall cost of capital and the appropriate use of the hurdle rate

The vice president of project finance at Marriott Corporation, prepares recommendations annually for the hurdle rates at each of the firm¡¯s three divisions. In this reflective case, the company¡¯s policies and strategies related with hurdle rates and cost of capital are discussed. In the above context, the company¡¯s policy of repurchasing its shares is also

Telstra was the most widely used telecom provider in Australia, but with the increasing competition and the entry of new companies, they are facing a decrease in their revenues. In 1990, Optus became the second largest telecom and fixed-line internet provider in Australia. Moreover, the telecom industry was following the traits of duopoly market. Nevertheless, with the technological advancement and rising competition many firms have entered the Australian market, which is a matter of concern for Telstra group (Ramli, 2015).

Such decisions may affect the company’s profitability today but judging from the fact that high risk means low stock price and vice-versa, high return waits in the future.

EnCana Corporation (EnCana) is one of North America’s leading natural gas producers. It is among the largest holders of natural gas and oil resource lands onshore North America and is a technical and cost leader in the in-situ recovery of oil sands bitumen. EnCana’s other operations include the transportation and marketing of crude oil, natural gas, and natural gas liquids; as well as the refining of crude oil and the marketing of refined petroleum products. Its operations are located in Canada, the US, Ecuador, and the UK.

The market risk premium of 5.5% and the risk free rate of 4.62% (30-year U.S. Treasury) were given in the case. The beta and the pre-tax cost of debt are based on our averaged comparative company analysis. Using the averaged beta of 1.05, the pretax cost of debt of 5.79%, (based on bond ratings) and the weighted average of debt & equity, the telecommunications segmented hurdle rate is calculated at 8.64% (see Exhibit 2).

Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This document will use a variety of these ratios to analyze the firm, Sample Company, as of December 31,2000.

For each division, the calculation of hurdle rates needs specific debt capacities, cost of debt and cost of equity consistent with the amount of debt. We get debt percentage, 74%, 40% and 42% in capital in Table A.

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.

On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual-fund management firm, pored over analysts' write-ups of Nike, Inc., the athletic-shoe manufacturer. Nike's share price had declined significantly from the beginning of the year. Ford was considering buying some shares for the fund she managed, the NorthPoint Large-Cap Fund, which invested mostly in Fortune 500 companies, with an emphasis on value investing. Its top holdings included ExxonMobil, General Motors, McDonald's, 3M, and other large-cap, generally old-economy stocks. While the stock market had declined over the last 18 months, the NorthPoint Large-Cap Fund had performed extremely well. In 2000, the fund

The Teletech Corporation is currently using a single, constant, hurdle rate for their two different segments, which are, telecommunications services and products and systems divisions. Based on the estimate of corporation’s WACC, the hurdle rate is the cost of capital.