Teletech Corporation Case Study

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Date Submitted: 11/12/2012 03:23 PM

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with them incorrectly would only increase confusion and misinformation. To the extent thatinflation did, in fact, influence money cost, it also meant that capital would remain expensive or could become more costly.Even if the appropriate hurdle rate was clear cut, how the rate should be used within thecompany in evaluating projects was not. Given the different natures of the two businesses and therisks each one faced, differences of opinion arose at the division-management level over theappropriateness of measuring all projects against the corporate hurdle rate of 13 percent. The chief protagonist of multiple rates was Ralph Aragon, president of the telecommunications division,who presented his views as follows:

Each phase of our business is different, must compete differently, and must draw on capitaldifferently. Until recently, telecommunications was a regulated industry, and the return on our totalcapital is highly certain, given the stable nature of the industry.Given the recognized safety of the investment, many telecommunications companies can raiselarge quantities of capital from the debt markets. In projects comparable to the ones we would consider,75 percent of the necessary capital is raised in the debt markets at interest rates reflecting AA quality,on average. Moreover, I estimate that our cost of equity is only 14 percent as compared to 20 percentfor computer software. If we make these changes, notice what they would do to our capital costs (using1987 data):


eight Cost


eighted Cost

Debt 75% 6.08% 4.56%Equity 25 14.00 3.50Total 8.06%

Especially at today's relatively low capital costs, telecommunications projects yield favorablepresent value ratios. I contrast this with the computer software and workstation division where,although sales and profitability are strong, risks are high. Independent companies are financed byhigher yield debt and more equity with higher expected total returns. In my book, their hurdle rateshould reflect these...