FIN 4596

Sec: 004
9/28/2014
Ryan Teichmann

Executive Summary
Corporate Raider Criticizes One-Hurdle Rate Approach of Teletech
Teletech is most known for their telecommunication services, which is
historically not a risky industry. Recently, Teletech has recently expanded into
Products and Services, which, comparatively, is more risky. Teletech
Corporation is facing a corporate raider named Victor Yossarian. Having
recently purchased 10% of Teletech and demanding two seats on the board
of directors, Yossarian proceeded to admonish the corporation over their use
of resources. Because the company only has one hurdle-rate, the firm may
be accepting unprofitable projects and rejecting profitable ones.
Implementing two hurdles rates, one specific to Telecommunications and
Services at a rate of 7.78%, and one specific to Products and Services at a
rate of 9.85%, is Teletechs best option. By implementing two hurdle rates, it
adjusts for the risk in each industry and allows for Teletech to adequately
value each segment.
Implementing two hurdles rates, one specific to Telecommunications
and Services at a rate of 7.78%, and one specific to Products and Services at
a rate of 9.85%, is Teletechs best option because it adjusts for the risk in
each industry and allows for Teletech to adequately value each segment.
Both of these figures were estimated based on comparable firms in the

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industries, as shown in Exhibit 1. With only one hurdle rate, Teletech fails to
take into account the risk the company faces within each segment. Rick
Phillips graph shows the importance of having two risk adjusted hurdle rates
compared to one constant hurdle rate. Telecom Services segments returns
are 9.1%, lower than the corporate hurdle rate of 9.30%. Products and
Systems returns are 11%, but at a much higher risk. The high risk is inferred
because comparable equipment manufacturers are financed with higher
yielding BB-rated debt and more equity with higher expected total returns,
because equity is riskier. By using two hurdle rates, it will lower the WACC
and the cost of equity in the less risky Telecommunications and Services
segment, while raising the WACC and the cost of equity in the more risky
Products and Services segment.
Helen Buono, the executive vice president of the product and systems
segment, has expressed concern regarding the use of multiple hurdle rates
and has argued in favor of the use of a single hurdle rate. Her concern lies
with the distribution of assets to certain segments and the effects they will
have on the value of the firm. As stated in the case, and seen in Exhibit 2,
the company shows good returns on capital (ROC) for both segments, with
Telecommunication Services showing a ROC of 9.10% and P&S showing a
ROC of 11.00%. In regards the effect assets will have on the full value of the
firm, both segments show a positive Net Operating Profit After-Tax (NOPAT of
approximately $1,600.00 respectively (Exhibit 2). By having two hurdle

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rates, each ROC in the specific segment being greater than the WACC
(telecommunication service ROC of 10.35% > than the WACC of 7.78% and
P&S ROC of 10.43% > than the WACC of 9.85%) for that segments, and a
positive NOPAT, both segments appear to be performing well with the
multiple hurdle rate policy. This is why we recommend having two hurdle
rates.

FIN 4596
Sec: 004
9/28/2014

Exhibits

Corporate

Telecommu
nications

Comparable
:

Services
MV Asset
Weights
Bond Rating
Pre-tax Cost of
Debt
Tax Rate
After-tax Cost
of Debt

Products
Comparable
and
:
Bell
Avaya
South
Systems
Inc.

100%
A-/BBB+

75%
A

25%
BB

BB

5.88%
40%

5.74%
40%

5.74%
40%

7.47%
40%

7.47%
40%

3.53%

3.44%

3.44%

4.48%

4.48%

Asset Beta
Rf
RM
RM-Rf
Cost of Equity

0.98
4.62%
10.12%
5.50%
10.00%

0.80
4.62%
10.12%
5.50%
9.02%

0.85
4.62%
10.12%
5.50%
9.29%

1.23
4.62%
10.12%
5.50%
11.39%

1.31
4.62%
10.12%
5.50%
11.83%

Weight of Debt
Weight of
Equity
WACC

22.20%

22.20%

22.20%

22.20%

22.20%

77.80%
8.57%

77.80%
7.78%

77.80%
7.99%

77.80%
9.85%

77.80%
10.19%

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Exhibit 1
Exhibit 2

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Exhibit 3

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