The recommendation for Teletech Corporation is to change from a constant hurdle rate to the use of two risk-adjusted hurdle rates, one for each segment. Teletech’s performance is evaluated upon economic profit calculations. Through this performance measure, the risk-adjusted hurdle rates return a higher amount of profit in comparison to a single corporate hurdle rate:
Currently, the firm has been using the constant hurdle rate of 9.30%, and as a result the firm’s share prices are stagnant. In comparison, the market and industry indexes such as telecommunications and telecommunication equipment have outperformed Teletech. Their price-to-earnings ratio is also below investor’s expectation in comparison to the company’s risk. With nearly $2 billion being invested in upcoming capital projects, the discount rate(s) to be used within the firm needs to be more accurate, account for risk, and not destroy shareholder’s value.
Teletech Corporation is divided into two main segments; Telecommunications Services and Products & Systems. Forward-looking, the firm will invest nearly $2 billion into projects.
The constant hurdle rate has been taking some heat from investors and has been addressed by Victor Yossarian. As part of the company’s responsibility, we are moving forward and evaluating the firm in its current state. The analysis taking place will provide arguments for using a constant hurdle rate versus segment risk-adjusted hurdle rates. The goal of the evaluation is to use the method that will benefit the term in the long-run and provide a better project assessment for future forecasts.
The Firm’s Current State
Teletech has been using a single corporate-wide hurdle rate to assess projects, allocate funds, and as the discount rate. The hurdle rate set at 9.3% is derived from using the weighted average cost of capital. In 2004, Telecommunications Services has returned less than the hurdle rate at 9.1%,...