Teletech Corporation, 2005

Question 1

  Currently, 9.30% is used as their hurdle rate and satisfied with the intellectual relevance of a hurdle rate as an expression of the opportunity cost of money by the managers. As a result the firm’s share prices are sluggish. Their price-to-earnings ratio is also below investor’s expectation in comparison to the company’s risk. The relationship between risk and return is important to take into consideration. The constant hurdle rate results in a flat line and doesn’t correlate risk with return. With nearly $2 billion being invested in upcoming capital projects, the discount rate to be used within the firm needs to be more accurate, account for risk, and not destroy shareholder’s value.

Currently the firm is not accurately assessing their future. Telecommunications Services is returning capital below the corporate hurdle rate and Products & Systems is above the rate, but the firm is not factoring in riskiness of the segments individually.

1. How does Teletech Corporation currently use the hurdle rate?

Teletech Corporation sees the hurdle rate as an expression of the opportunity cost of money. In other words, it can be seen as a measure of value creation for use at the both segments (Telecommunication Services; Products and Systems) and business-unit that would provide a proxy for the way investors would view each unit’s performance. With a beta of 1.15, the cost of equity might be about 10.95%. At market-value weights of 22% for debt and 78% for equity, the resulting WACC would be 9.30%; therefore, the hurdle rate of 9.30% was applied to all investment and performance-measurement analyses at the firm.

However, we understood that only one hurdle rate for two different segments has raised some concerns in the company. Given the differing natures of the two businesses and the risks each other faced, one opinion supports multiple hurdle rates which would be risk-adjusted. One other opinion underlined that all investment shall be judged against...