Executive earning a return on capital of 9.10%,

Executive Summary:
Teletech Corporation, 2005

 

 

Teletech Company has two major
operations: telecommunication services and Product & System. While its
telecommunication services has grown by 3% from 2000 to 2004 with a revenue of
$11 billion and earning a return on capital of 9.10%, its Product & Systems
segment had also grown with an increased in sales of 40% in 2004 and a return
on capital of 11%. However, one shareholder, Victor Yossarian, has asked the
company to sell its Product & Systems segment and only concentrate on
generating value to the shareholders. Teletech decided to use a hurdle rate of
9.3% in order to evaluate its performance and help determine its decision
revolving around its capital spending. With a required rate of return of about
9.3% and a calculated WACC of 9.303%, it shows that Teletech business units are
not creating value for the company. Due to creating so little value, Teletech
share prices have not been growing as fast as the market/industry prices. With
this information, Teletech Company must decide whether to keep using one
constant corporate hurdle rate or if they should use different hurdle rates for
each segment.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

My recommendation to the Mrs.

Weston:

·     
Using two different hurdles rates for its departments,
would allow it to determine the most efficient way to allocate capital and it
will have a better reflection on how each unit are performing individually.

·     
I would also recommend Teletech Company to use a
risk adjusted hurdle rate since a constant hurdle rate does not compensate the
risk. By using a non-risk adjusted hurdle rate, we are able to determine that
it will actually undervalue its telecommunications services department

·     
By having an individual WACC for Products &
Systems operations, we are able to see that it is actually underperforming
compared to its telecommunication service. With this, Teletech can now address
it by using an individual WACC.

x

Hi!
I'm Johnny!

Would you like to get a custom essay? How about receiving a customized one?

Check it out