Case 16 Teletech

Case 16 Teletech corp.

1. Teletech use their hurdle rate as a tool to evaluate projects, assess economic profit and NPV. this is the method used by the company to calculate their NPV using the hurdle rate.

2. Seeing the numbers provided, and using the WACC equation of:

The WACC of Telecommunications and P&S are estimated to be 9,28% and 9,51% respectively. The key data that makes up the judgment are the Total Market Value of Equity (MVe = 77,8%), the Total Market Value of Debt (MVd = 22,2%), the Cost of Equity (Re = 10,95%), the Pretax cost of Debt (Rd = 5,74% and 7,47%) and the Tax rate (t = 40%)

3. Seeing the graph, the choice of Hurdle rates used would affect the evaluation of the two segments accordingly to their positions and the Hurdle Rate used. In the case of the constant rate, the evaluation would show that the telecomm services are not meeting the necessary returns as the returns are lower than the Corporate Hurdle Rate, while the returns on the Products and System are shown to be very good as they are well above the Corporate Hurdle Rate. However, if the Risk-Adjusted Hurdle Rate is used, the results shown become reversed. The returns from the Telecommunications Services are shown to be profitable and above the Hurdle Rate used in the low risk areas, while the returns on Products and Systems are shown to not be profitable, as they are below the Hurdle Rate used in the high risk areas.

4. I agree but only to a certain point. What Helen Buono said, I agree to the fact that investors only concern is to make sure that the corporate they invest in would give back what they demand in return for the amount of investment they have given, but internally, the corporation obligation is not only to give their investor the expected return, but also to make sure of the growth and survival of the company itself. In this case the risk-adjusted hurdle rate may give a less satisfying result compare to the corporate hurdle rate, doesn’t mean that it is not the...