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This spreadsheet supports STUDENT analysis of the case Teletech Corporation (Case 16).

This spreadsheet was prepared by Professor Kenneth Eades. Copyright 2005 by the University of Virginia Darden School Foundation, Charlottesville, VA. All
rights reserved. For customer service inquiries, send an e-mail tosales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in
a retrieval system, posted to the Internet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout
the permission of the Darden School Foundation. Rev. 11/09.
Exhibit 1
Summary of WACC Calculation for Teletech Corporation and Segment Worksheet

Telecommunications Products
Corporate Services and Systems
MV asset weights 100% 75% 25%
Bond rating A-/BBB+ A BB
Pretax cost of debt 6.114% 5.74% 7.47%
Tax rate 40% 40% 40%
After-tax cost of debt 3.53% 3.44% 4.48%

Equity beta 1.15 1.04 1.40


Rf 4.62% 4.62% 4.62%
RM 10.12% 10.12% 10.12%
RM-Rf 5.50% 5.50% 5.50%
Cost of equity 10.95% 10.36% 12.32%

Weight of debt 22.2% 27.1% 7.5%


Weight of equity 77.8% 72.9% 92.5%
WACC (Single Rate) 9.30% 8.49% 11.73%

Data sources: Bloomberg LP, S&P Research Insight, case writer analysis.

I II III
Scenarios
Telecom Only Telecom & P+S P+S Only
Allocation of Resource
- Telecom 100% 75% 0%
- P&S 0% 25% 100%
Invested Capital (mn USD) 2,000 2,000 2,000
ROC 9.10% 9.58% 11.0%
NOPAT 182 192 220
WACC 8.49% 9.30% 11.73%
Value to Enterprise (mn USD) 2,144 2,059 1,875
Economic Profit 12.21 5.49 (14.65)
Debt to Capital of Telecom
0.0% 24.1% 25.1% 26.1% 27.1% 28.1%
6.2%
Debt to Capital of P&S

7.2%
8.2%
7.5%
10.2%
11.2%
12.2%
13.2%
l of Telecom
29.1% 30.1% 31.1%
Exhibit 3
TELETECH CORPORATION, 2005
Samples of Comparable Firms

Book Val. Mkt. Val. Mkt. Val. Price-


2004 Equity Bond Debt/Total Price to Debt/ Debt/ Price/ Close Com Shares LT Debt- Mkt. Value Unlevered Levered
Company Name Revenues Beta Rating Capital Book Capital Equity Earnings Fiscal Year Outstanding Total Equity Beta Beta

Teletech Corporation 16,000 1.15 A/BBB+ 46% 3.0 22% 29% 12.9

Telecommunuications services industry


Alltel Corp. 8,246 1.00 A 42.3% 2.4 23.2% 30.1% 15.4 $58.76 302 5,352 17,761 0.85 1.07
AT&T Corp. 30,537 1.10 BB+ 53.9% 2.0 36.6% 57.7% (2.4) $19.06 799 8,779 15,221 0.82 1.03
BellSouth Corp. 20,350 1.00 A 38.1% 2.1 22.9% 29.7% 16.7 $27.79 1,831 15,108 50,883 0.85 1.07
Centurytel Corp. 2,411 1.05 BBB+ 42.5% 1.3 37.0% 58.8% 13.3 $35.47 132 2,762 4,695 0.78 0.98
Citizens Communications Co. 2,193 1.00 BB+ 76.1% 3.5 47.7% 91.1% 65.0 $13.79 340 4,267 4,684 0.65 0.81
IDT Corp. 2,217 1.05 NA 2.5% 1.2 2.1% 2.1% (19.3) $15.75 96 32 1,513 1.04 1.30
SBC Communications Inc. 40,787 1.05 A 32.3% 1.9 20.0% 25.0% 19.6 $25.77 3,301 21,231 85,065 0.91 1.15
Sprint Corp. 27,428 1.15 A 50.8% 2.4 30.3% 43.4% (43.1) $24.85 1,475 15,916 36,649 0.91 1.15
Verizon Communications Inc. 71,283 1.00 A+ 45.0% 2.6 24.1% 31.8% 12.5 $40.51 2,770 35,674 112,199 0.84 1.06
Average 1.04 42.6% 2.15 27.1% 41.1% 8.65

Telecommunications equipment industry


Avaya Inc. 4,057 1.35 BB 14.0% 3.5 4.4% 4.6% 18.3 $13.94 456 294 6,354 1.31 1.38
Belden CDT Inc. 966 1.45 NA 19.9% 1.2 17.5% 21.3% 38.7 $23.20 47 233 1,095 1.29 1.35
Commscope Inc. 1,153 1.10 BB 36.9% 2.0 22.4% 28.9% 10.3 $18.90 54 297 1,030 0.94 0.98
Corning Inc. 3,854 1.45 BBB 41.9% 5.4 11.8% 13.4% (11.1) $11.77 1,408 2,214 16,572 1.34 1.41
Harris Corp. 2,519 1.05 BBB 24.5% 2.7 10.7% 11.9% 21.9 $25.38 133 401 3,367 0.98 1.03
Lucent Technologies Inc. 9,045 1.75 B 109.8% (26.0) 30.1% 43.0% 6.0 $3.17 4,395 5,989 13,932 1.39 1.46
Nortel Networks Corp. 9,828 1.75 NA 43.9% 3.0 20.7% 26.0% (51.8) $3.47 4,273 3,862 14,826 1.51 1.59
Plantronics Inc. 560 1.20 NA 0.7% 4.2 0.2% 0.2% 17.0 $38.08 48 3 1,844 1.20 1.26
Scientific-Atlanta Inc. 1,708 1.45 NA 0.4% 2.6 0.1% 0.1% 20.7 $34.50 153 8 5,292 1.45 1.52
Average 1.39 32.5% (0.15) 13.1% 16.6% 7.77

Computer and network equipment industry


EMC Corp. 8,229 1.55 BBB 1.0% 2.9 0.4% 0.4% 34.3 $14.87 2,405 128 35,762 1.55 1.62
Gateway Inc. 3,650 1.35 NA 42.3% 5.5 11.8% 13.4% (4.2) $6.01 372 300 2,237 1.25 1.31
Hewlett-Packard Corp. 79,905 1.45 A 12.7% 1.7 7.8% 8.5% 18.5 $18.66 2,911 4,623 54,315 1.38 1.45
Int'l. Business Machines Corp. 96,293 1.10 A+ 27.1% 4.1 8.4% 9.1% 15.2 $98.58 1,646 14,828 162,222 1.04 1.09
Lexmark Int'l. Inc. 5,314 1.15 NA 5.5% 4.2 1.4% 1.4% 15.5 $85.00 128 150 10,846 1.14 1.20
NCR Corp. 5,984 1.20 NA 13.7% 3.3 4.5% 4.8% 21.1 $34.62 187 307 6,459 1.17 1.22
Seagate Technology 6,224 1.20 NA 33.0% 4.4 10.0% 11.1% 25.0 $14.43 460 739 6,632 1.12 1.18
Storage Technology Corp. 2,224 1.15 NA 0.8% 2.4 0.3% 0.3% 18.2 $31.61 107 11 3,396 1.15 1.20
Western Digital Corp. 3,047 1.80 NA 12.5% 4.8 2.9% 3.0% 16.7 $8.66 206 53 1,785 1.77 1.85
Average 1.33 16.5% 3.70 5.3% 5.8% 17.81

Data source: Value Line Investment Survey, S&P Research Insight.


Exhibit 4
TELETECH CORPORATION, 2005
Debt Capital Market Conditions, October 2005

Corporate Bond Yields U.S. Treasury Securities

Industrials
AAA 5.44% 3-month 3.56%
AA 5.51% 6-month 3.99%
A 5.74% 2-year 4.23%
3-year 4.23%
BBB 6.23% 5-year 4.25%
BB 7.47% 10-year 4.39%
B 8.00% 30-year 4.62%

Phones
A 6.17%
BBB 6.28%

Utilities
A 5.69%
BBB 6.09%

Data source: Bloomberg LP.


Figure 2.

Rick Phillips' Assessment of


Constant vs. Risk-Adjusted Hurdle Rates

18.00%

16.00%

14.00%
Products and
Systems
12.00%
% Rate of Return

Risk-adjusted Hurdle
10.00%
Teletech Corp. Hurdle
8.00% Telecomm. Services
Products and Systems
6.00%

4.00% Telecommunications
Services
2.00%

0.00%

Risk Level
Products and
Systems

Risk-adjusted Hurdle
Teletech Corp. Hurdle
Telecomm. Services
Products and Systems