Case Study: Teletech Corporation, 2005

Question #1. Estimate the individual WACCs for each of Teletech’s Segments. As you do so,

carefully indicate any assumption in your calculations.

By treating the two segments as a separate business this is what we discovered:

CAPM - Telecommunications Services

Rf = 4.235

Beta = 1.02

Rm-Rf = (9.5%-4.23%) = 3.77%

Cost of equity = 4.23% +1.02(9.5-4.23%) = 9.6%

WACC = (25% )(3.44%) + (75% )(9.6%)

WACC = .0086 + .072 = 8.1%

CAPM – Products and Systems

Rf = 4.39%

Beta = 1.4

Rm- Rf = (12%-4.39%) = 7.61%

Cost of equity = 4.39% + 1.4(12%-4.39%) = 15.1%

WACC = (75% )(4.48%) + (25% )(15.1%)

WACC = .0336 + .0378 = 7.14%

CAPM – Teletech Corporation

WACC = 9.30%

Conclusion:

The decrease in the individual WACC’s prove that there is overall lower risk and

should result in an increase in valuation of the firm. This is something that Victor Yossarian

must have discovered and knows the company stock is undervalued. The cost of capital

percentages used in our calculations where based on Exhibit 4 Debt-Capital-Market

Conditions, October 2005. (Bruner Pg 231)The company’s current method of value-creation

used hurdle rates and was used to calculate the WACC of Teletech. Management decision to

accept the investments bankers’ calculation of the WACC of 9.3% is “split rated” and

therefore strictly speculative. We are sure it was in the investments bankers’ best interest

and not that of Teletech. This speculative WACC left room for error and Victor discovered it.

Money is green but can be greener, especially when there is money left on the table and

nobody is claiming it. As is the case with Teletech, in acquiring separate lines of credit for

each of its segments not only will management but everybodypoor grammar will get a better picture and

understanding of how the company is being run instead of just looking at the outside of the

“black box”. Looking at the separate WACCs for both segments we clearly demonstrate not

only is...