Sie sind auf Seite 1von 4

Question #1. Estimate the individual WACCs for each of Teletechs Segments.

As you do so,
carefully indicate any assumption in your calculations.
By treating the two segments as a separate business this is what we discovered:
CAPM - Telecommunications Services
Rf = 4.235
Beta = 1.02
Rm-Rf = (9.5%-4.23%) = 3.77%
Cost of equity = 4.23% +1.02(9.5-4.23%) = 9.6%
WACC = (25% )(3.44%) + (75% )(9.6%)
WACC = .0086 + .072 = 8.1%
CAPM Products and Systems
Rf = 4.39%
Beta = 1.4
Rm- Rf = (12%-4.39%) = 7.61%
Cost of equity = 4.39% + 1.4(12%-4.39%) = 15.1%
WACC = (75% )(4.48%) + (25% )(15.1%)
WACC = .0336 + .0378 = 7.14%
CAPM Teletech Corporation
WACC = 9.30%
The decrease in the individual WACCs prove that there is overall lower risk and
should result in an increase in valuation of the firm. This is something that Victor Yossarian
must have discovered and knows the company stock is undervalued. The cost of capital
percentages used in our calculations where based on Exhibit 4 Debt-Capital-Market
Conditions, October 2005. (Bruner Pg 231)The companys current method of value-creation
used hurdle rates and was used to calculate the WACC of Teletech. Management decision to
accept the investments bankers calculation of the WACC of 9.3% is split rated and
therefore strictly speculative. We are sure it was in the investments bankers best interest
and not that of Teletech. This speculative WACC left room for error and Victor discovered it.
Money is green but can be greener, especially when there is money left on the table and
nobody is claiming it. As is the case with Teletech, in acquiring separate lines of credit for
each of its segments not only will management but everybodypoor grammar will get a better
picture and
understanding of how the company is being run instead of just looking at the outside of the
black box. Looking at the separate WACCs for both segments we clearly demonstrate not
only is the split rate WACC used by the corporate corporationhigher than the individual
segments.Please see my earlier comments regarding the logic of your conclusion.
Question #2. Do you agree that all money is green? What are the arguments in favor? What are
the arguments against?
For Teletech Corporation, we concluded its book value of net assets $16 billion says a whole
lot. Yes all money is green as long as the company is making a profit. Although the company is

under two segments as telecommunications and products and systems, its return on capital is
brought into one pile. The majority of its capital comes from telecommunications with 75 % of its
market, making it more profitable.
All money is green can refer to Teletech as a whole because that is how they are listed. Even
though exhibit 1, notes that 75% of its MV assets weights is in telecommunication.??? (incomplete
sentence) The WACC is the hurdle rate for Teletech Corporation, standing at 9.30 %. This is shown
for management as an opportunity cost as the case notes, revealing more money??? for the
corporation. The Hurdle Rate being 9.30% means it is not a high risk corporation .
Telecommunications Products and Systems
MV assets weights
100% 75% (most of the profit)
Bond Rating A-/BBB+
A (highly credited)
BB(medium credited)
Pretax cost of debt
5.88% 5.74% 7.47%
Tax Rate
40% 40% 40%
After Tax cost of debt 3.53% 3.44% 4.48%
Equity beta
Rm-Rf 5.50%
Cost of Equity 10.95%
Weight of debt 22.2%
Weight of Equity
WACC 9.30%
(Teletech Corporations, 2005 Case 15; Source of data: Bloomberg LP S&P Research insight case
writers analysis)
According to Helen Buono, executive vice president of Products and Systems, all money is
money.She says that Teletech corporation should be judged with one hurdle rate. The hurdle rate
listed as 9.30 % as commented previously meaning it is not a high-risk corporation . It makes
investors want to invest in Teletech Corporation. In Exhibit 1 , it shows the bond rating,
Telecommunication services has an A rating meaning it is a high risk but Products and Systems
has a BB which is low risk almost a junk bond.Poor grammar Bringing them together as
Teletech Corporation, it is an A-/BBB+ meaning no risk . So in the case of Teletech Corporation, all
money is green relates to investors and to the profit telecommunications brings to the firm.
On the other hand we can disagree that not all money is green, because investors or
stockholders do research and understand how profits and cost of capital can determine if a
firm is being mismanaged.According to Rick Phillips, executive vice president of
Telecommunications services, there are several convincing reasons for having two hurdle
rates. He believes that the firm would be better served by risk risk-adjusted hurdle rates for
each segment due to the significant variance in risk and capital-raising activities. This
argument is supported by the fact that Telecommunications services bond ratings are below
industry ratings but could be upgraded with the implementation of separate hurdle
rates. The Telecommunications segment has a lower than recognized cost of equity and
could raise more capital by issuing debt. As the P&Sincorrect first use of an acronym segment
grows rapidly it takes up a

significant amount of available capital for the firm. Phillips believes that if nothing is done
to factor in a risk component into the hurdle rate his division [...] starve for capital, while
Products and Systems will be force-fed - thats because our returns are less that the
corporate hurdle rate, and theirs are greater. (Bruner, 2009) Another claim made by
Phillips regarding the potential benefit of risk-adjusted hurdle rates and??? states that if loans
are extended to Teletech with separate hurdle rates for each segment then the cost over
time t o finance debt will decrease. Phillips also suggests that the risk-adjusted hurdle rates
will help communicate the risk inherent to each respective segment to investors in a more
effective way. By addressing the under-performing price-to-earnings ratio and the high cost
of equity financing he hopes to make the case that the segment could get the best returns
on equity for the risk by using multiple hurdle rates.
While the concern of segmenting the hurdle rate is risky and argumentative, we
believe Teletech would benefit more from establishing separate risk-adjusted hurdle rates
for the two segments. The operational, financial, and investment decisions of each segment
should be kept separate in order to accurately represent the unique needs, specifications
and risks necessary to maximize the ability??? of each particular segment. This financial
strategy would benefit all Teletech stakeholders while introducing an element of
risk. Assuming there is proper transparency within thefirm, when the separate hurdle rates
were incorporated into Teletechs corporate budgeting activities, investors would be better
informed about the risk associated with the respective segments and the firm
collectively. Investors would be more capable of assessing the corporations growth
potential and profitability. This would clarify the true amount of risk for each segment and
would increase stockholders perception of the firms value in a positive way. If a single
corporate hurdle rate is maintained, investors may raise concern that striving to meet a
single corporate hurdle rate is an attempt to blanket potential losses from weak segments.
Each segment would stand alone and not as a floatation device for the other. An open
window to the profitability and viability of each segment would increase investor insight and
Question #3. Is Helen Buono right that management would destroy value if all the firms assets
were redeployed into only the telecommunications business segment? Why or why not? Please
prepare a numerical example to support your view
Helen Buono, Executive Vice President of Products and Systems segment, believed that there
should only be one hurdle rate in order to receive the highest absolute rate of return for the
investors. She stated that if there were two different hurdle rates then the corporate hurdle rate
would never be met. This would destroy shareholder value. As opposed to Rick Phillips argument
where he stated each segment of a business is different therefore it should be calculated
differently. Mr. Phillips stated that if each department is different it should also compete differently
and draw on capital differently.
It is understandable for Helen to argue that it is better for the business as a whole to use one
hurdle rate because of the segment of the business she represents and understands that it is to
her convenience for her department's performance to be based on the overall performance of the
company. Helen makes some good arguments that are understandable however would her
decision be best for the company overall? Should a department with lower demand get the same

funds as the higher demand department? We have concluded that we agree with Rick Phillips
views and his arguments for risk- adjusted hurdle rates.
For example, retail store with several different departments. One department can sell high end flat
screen televisions and the other sell washers and dryers. The television department total return is
75% and washers and dryers total return 25%. Together the two departments make $100K in
profit. It would be to our best interest to focus more on the television department. We can achieve
this by allowing this department to have greater funding volumes then the washer and dryer
department. We can also devote more effort by moving one or more employees from the washer
and dryer department to the television department to reach our highest capital return. Moving
employees from one department to another would help because we focus more in the department
which brings in the most revenue. It is easier to move existing employees that are knowledgeable
in the industry to help a different department with higher demand. I get the point, but I am not sure
of the relevance of your illustration.
Question #4. What should Teletech say in response to Victor Yossarian?
To Whom It May Concern,I like the idea, but not necessary
We received a letter in regards to the possible misuse of resources and below par returns.
Here at Teletech Corporation our entire purpose for being is to provide the best telecommunication
service along with superior products and systems to complement that service. Even with todays
ever ever-changing market and increased regulation we go to extreme lengths to ensure that we
provide our partners and shareholders with the best possible returns. Although market marketlevel returns are not always possible, we have in place a team of experts within our company that
continuously work towards achieving that goal. We have addressed several issues and concluded
that by treating our two segments like individual firms we will be able to increase our overall
company value. In doing so we have also discovered that our Products and Systems division is
doing better than expected and will only further cement the direction and future of this company.
As for the two board seats you have requested, we will be more than happy to put it on our

Works Cited
Bruner, Robert F., Ken M. Eades, and Michael J. Schill.Case Studies in Finance: Managing for
Corporate Value Creation. Boston: McGraw-Hill Irwin, 2010. Print.