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Teletech

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Submitted By waterskier72685
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Teletech Teletech Corporation is split between two main business segment that include both Telecommunications Services as well as Products and Systems (P&S). Although the two segments provide different services to customers, Teletech has decided to apply a hurdle rate of 9.30% to all capital projects in the evaluation of the performance of business units. In my opinion, this is a mistake that is costing the company money. They should be using separate hurdle rates for the two different market segments because the markets they serve are different in terms of risk.
In calculating the WACC for each segment, I did the following:
Telecommunications Services Products and Systems
WD 0.271 WD 0.092
WS 0.729 WS 0.908
RD 5.74 RD 7.47
RS 10.34 RS 11.99
Beta 1.04 Beta 1.34
RM-RF 5.5 RM-RF 5.5
RM 10.12 RF 10.12
RF 4.62 RF 4.62
1-T 0.60 1-T 0.60
WACC 8.47 WACC 11.30

I used the average beta of the Telecommunications Services Industry in calculating the WACC for the Telecommunications Services segment. For the Products and Systems segment, I used the average of the Telecommunications Equipment Industry and the Computer and Network Equipment Industry. I also made the assumption that RF and Rm for each segment would be equivalent to the Teletech as a whole. You Can see from the charts that the Products and Systems side has a significantly higher WACC than the Telecommunications segment, meaning there is less risk associated with the Telecommunications segment. Rick Phillips prepared a graph that illustrates a constant hurdle rate for Teletech versus where he believes the hurdle rate should be for each of the two segments that make up Teletech. Based on the constant hurdle rate, Teletech would give a majority of capital to P&S while Telecommunications would starve of capital. This is a concern as Teletech would be better off investing capital in…...

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