Teletech Case Essay

401 Words2 Pages
Teletech Corporation described itself as “a provider of integrated information movement and management”. It was comprised of two business segments: the Telecommunications Services and the Products and Systems divisions. The telecommunications business which provides telephone services throughout the Midwest and Southwest are its only business before 2000 when it added the Products and Systems divisions after its acquisition of a computing workstation manufacturer. Teletech has long used a single corporate wide hurdle rate. Since the hurdle rate is usually the cost of capital, WACC for the company is calculated as below: Cost of debt 5.88% After tax 3.53% D/E 28.21% Company Beta 1.15 Cost of equity 10.95% WACC 9.3% It means that any project that will not return 9.3% will be rejected and anything above 9.3% has a good chance of being accepted. Actually the required rate of return and the systematic risk of cash flows for each project were not equal. Actually the projects with low return has a lower beta and would have a lower hurdle rate and projects with higher return have a higher beta and higher hurdle rate. The application of single hurdle rate will result in rejection of projects which return is higher than the actual hurdle rate and accept projects which return is lower than the actual hurdle rate. In other words, it would lead to false rejects for Telecom services while signaling false accepts for the Product and Systems group. Therefore it is suggested that different hurdle should be used based on the specific amount of risk. But it is improbable to accurately estimate beta for each projects, we need to find hurdle rates for projects with similar risks. In the case of Teletech, the telecomuncitions industry is less risky with lower return and computer and telecommunications products and services segment by contrast is more risky with higher
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