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Teletech Case

After careful review of the Teletech case I think that Rick Phillips thought on the method to calculate hurdle rate or WACC is the most aligned with industry standards and would be the most financially beneficial to the company overall. The current method that Teletech Corporation is using for hurdle rate is an overall average for the company; all segments combined using an averaged beta for the company, regardless of the risk of each division. If the companies risk level was very similar for each division this would be an appropriate method per industry standards, but due to the varying risk with each division the hurdle rate should be calculated separately for each division and financial decisions for capital investment based upon these hurdle rates.
If you break the hurdle rates out for each division it shows that the Services division has a hurdle rate of 8.8%, using market value available date and the Products and Systems division has a hurdle rate of 10.4%, using market value data of similar risk companies. Comparing these to the averaged company hurdle rate of 9.3% shows that the services division’s capital projects would bring a higher rate of return to the company than the P&S divisions; even though this would not be seen if you were only looking at an average. The P&S division projects could actually have negative returns based on the division hurdle rates. This is what Rick Phillips was trying to express by presenting his graph of constant versus risk adjusted hurdle rates.
The company is also overvaluing the P&S division and under valuing the Services division by utilizing a constant hurdle rate that does not take into account risk. This can be seen by looking at the Economic Profit calculations for each division:
EP = (ROC- Hurdle Rate) X Capital Employed
EP for Services Division – using corporate averaged hurdle rate…...

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