Question #1. Estimate the individual WACCs for each of Teletech’s Segments. As you do so, carefully indicate any assumption in your calculations.
By treating the two segments as a separate business this is what we discovered:
CAPM - Telecommunications Services
Rf = 4.235
Beta = 1.02
Rm-Rf = (9.5%-4.23%) = 3.77%
Cost of equity = 4.23% +1.02(9.5-4.23%) = 9.6%
WACC = (25% )(3.44%) + (75% )(9.6%)
WACC = .0086 + .072 = 8.1%
CAPM – Products and Systems
Rf = 4.39%
Beta = 1.4
Rm- Rf = (12%-4.39%) = 7.61%
Cost of equity = 4.39% + 1.4(12%-4.39%) = 15.1%
WACC = (75% )(4.48%) + (25% )(15.1%)
WACC = .0336 + .0378 = 7.14%

CAPM – Teletech Corporation
WACC = 9.30%
Conclusion:
The decrease in the individual WACC’s prove that there is overall lower risk and should result in an increase in valuation of the firm. This is something that Victor Yossarian must have discovered and knows the company stock is undervalued. The cost of capital percentages used in our calculations where based on Exhibit 4 Debt-Capital-Market
Conditions, October 2005. (Bruner Pg 231)The company’s current method of value-creation used hurdle rates and was used to calculate the WACC of Teletech. Management decision to accept the investments bankers’ calculation of the WACC of 9.3% is “split rated” and therefore strictly speculative. We are sure it was in the investments bankers’ best interest and not that of Teletech. This speculative WACC left room for error and Victor discovered it.
Money is green but can be greener, especially when there is money left on the table and nobody is claiming it. As is the case with Teletech, in acquiring separate lines of credit for each of its segments not only will management but everybodypoor grammar will get a better picture and understanding of how the company is being run instead of just looking at the outside of the
“black box”. Looking at the separate WACCs for both segments we clearly demonstrate not only is the “split rate” WACC used by the corporate corporationhigher than the individual segments.Please see my earlier comments regarding the logic of your conclusion.

Question #2. Do you agree that “all money is green”? What are the arguments in favor? What are the arguments against?

For Teletech Corporation, we concluded its book value of net assets $16 billion says a whole lot. Yes all money is green as long as the company is making a profit. Although the company is under two segments as telecommunications and products and systems, its return on capital is brought into one pile. The majority of its capital comes from telecommunications with 75 % of its market, making it more profitable.
All money is green can refer to Teletech as a whole because that is how they are listed. Even though exhibit 1, notes that 75% of its MV assets weights is in telecommunication.??? (incomplete sentence) The WACC is the hurdle rate for Teletech Corporation, standing at 9.30 %. This is shown for management as an “opportunity cost” as the case notes, revealing more money??? for the corporation. The Hurdle Rate being 9.30% means it is not a high risk corporation . Corporate Telecommunications Products and Systems
MV assets weights 100% 75% (most of the profit) 25%
Bond Rating A-/BBB+ A (highly credited) BB(medium credited)
Pretax cost of debt 5.88% 5.74% 7.47%
Tax Rate 40% 40% 40%
After Tax cost of debt 3.53% 3.44% 4.48%
Equity beta 1.15
Rf 4.62%
Rm 10.12%
Rm-Rf 5.50%
Cost of Equity 10.95%
Weight of debt 22.2%
Weight of Equity 77.8%
WACC 9.30%
(Teletech Corporations, 2005 –Case 15; Source of data: Bloomberg LP S&P Research insight case writers’ analysis)

According to Helen Buono, executive vice president of Products and Systems, all money is money.She says that “Teletech corporation should be judged with one hurdle rate“. The hurdle rate listed as 9.30 % as commented previously meaning it is not a high-risk corporation . It makes investors want to invest in Teletech Corporation. In Exhibit 1 , it shows the bond rating, Telecommunication services has an A rating meaning it is a high risk but Products and Systems has a BB which is low risk almost a junk bond.Poor grammar… Bringing them together as Teletech Corporation, it is an A-/BBB+ meaning no risk . So in the case of Teletech Corporation, all money is green relates to investors and to the profit telecommunications brings to the firm. On the other hand we can disagree that not all money is green, because investors or stockholders do research and understand how profits and cost of capital can determine if a firm is being mismanaged.According to Rick Phillips, executive vice president of
Telecommunications services, there are several convincing reasons for having two hurdle rates. He believes that the firm would be better served by risk risk-adjusted hurdle rates for each segment due to the significant variance in risk and capital-raising activities. This argument is supported by the fact that Telecommunications services bond ratings are below industry ratings but could be upgraded with the implementation of separate hurdle rates. The Telecommunications segment has a lower than recognized cost of equity and could raise more capital by issuing debt. As the P&Sincorrect first use of an acronym segment grows rapidly it takes up a significant amount of available capital for the firm. Phillips believes that if nothing is done to factor in a risk component into the hurdle rate his division “[...] starve for capital, while
Products and Systems will be force-fed - that’s because our returns are less that the corporate hurdle rate, and theirs are greater.” (Bruner, 2009) Another claim made by
Phillips regarding the potential benefit of risk-adjusted hurdle rates and??? states that if loans are extended to Teletech with separate hurdle rates for each segment then the cost over time t o finance debt will decrease. Phillips also suggests that the risk-adjusted hurdle rates will help communicate the risk inherent to each respective segment to investors in a more effective way. By addressing the under-performing price-to-earnings ratio and the high cost of equity financing he hopes to make the case that the segment could get the best returns on equity for the risk by using multiple hurdle rates. While the concern of segmenting the hurdle rate is risky and argumentative, we believe Teletech would benefit more from establishing separate risk-adjusted hurdle rates for the two segments. The operational, financial, and investment decisions of each segment should be kept separate in order to accurately represent the unique needs, specifications and risks necessary to maximize the ability??? of each particular segment. This financial strategy would benefit all Teletech stakeholders while introducing an element of risk. Assuming there is proper transparency within thefirm, when the separate hurdle rates were incorporated into Teletech’s corporate budgeting activities, investors would be better informed about the risk associated with the respective segments and the firm collectively. Investors would be more capable of assessing the corporation’s growth potential and profitability. This would clarify the true amount of risk for each segment and would increase stockholders’ perception of the firms value in a positive way. If a single corporate hurdle rate is maintained, investors may raise concern that striving to meet a single corporate hurdle rate is an attempt to blanket potential losses from weak segments.
Each segment would stand alone and not as a floatation device for the other. An open window to the profitability and viability of each segment would increase investor insight and morale. Question #3. Is Helen Buono right that management would destroy value if all the firm’s assets were redeployed into only the telecommunications business segment? Why or why not? Please prepare a numerical example to support your view
Helen Buono, Executive Vice President of Products and Systems segment, believed that there should only be one hurdle rate in order to receive the highest absolute rate of return for the investors. She stated that if there were two different hurdle rates then the corporate hurdle rate would never be met. This would destroy shareholder value. As opposed to Rick Phillips’ argument where he stated each segment of a business is different therefore it should be calculated differently. Mr. Phillips stated that if each department is different it should also compete differently and draw on capital differently.
It is understandable for Helen to argue that it is better for the business as a whole to use one hurdle rate because of the segment of the business she represents and understands that it is to her convenience for her department's performance to be based on the overall performance of the company. Helen makes some good arguments that are understandable however would her decision be best for the company overall? Should a department with lower demand get the same funds as the higher demand department? We have concluded that we agree with Rick Phillips’ views and his arguments for risk- adjusted hurdle rates.
For example, retail store with several different departments. One department can sell high end flat screen televisions and the other sell washers and dryers. The television department total return is 75% and washers and dryer’s total return 25%. Together the two departments make $100K in profit. It would be to our best interest to focus more on the television department. We can achieve this by allowing this department to have greater funding volumes then the washer and dryer department. We can also devote more effort by moving one or more employees from the washer and dryer department to the television department to reach our highest capital return. Moving employees from one department to another would help because we focus more in the department which brings in the most revenue. It is easier to move existing employees that are knowledgeable in the industry to help a different department with higher demand. I get the point, but I am not sure of the relevance of your illustration.

Question #4. What should Teletech say in response to Victor Yossarian?
To Whom It May Concern,I like the idea, but not necessary… We received a letter in regards to the possible misuse of resources and below par returns. Here at Teletech Corporation our entire purpose for being is to provide the best telecommunication service along with superior products and systems to complement that service. Even with today’s ever ever-changing market and increased regulation we go to extreme lengths to ensure that we provide our partners and shareholders with the best possible returns. Although market market-level returns are not always possible, we have in place a team of experts within our company that continuously work towards achieving that goal. We have addressed several issues and concluded that by treating our two segments like individual firms we will be able to increase our overall company value. In doing so we have also discovered that our Products and Systems division is doing better than expected and will only further cement the direction and future of this company.

As for the two board seats you have requested, we will be more than happy to put it on our agenda

Works Cited

Bruner, Robert F., Ken M. Eades, and Michael J. Schill.Case Studies in Finance: Managing for Corporate Value Creation. Boston: McGraw-Hill Irwin, 2010. Print.