...return From Wikipedia, the free encyclopedia In business and engineering, the minimum acceptable rate of return, often abbreviated MARR, or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other projects.[1]. A synonym seen in many contexts is minimum attractive rate of return. For example, suppose a manager knows that investing in a conservative project, such as a bond investment or another project with no risk, yields a known rate of return. When analyzing a new project, the manager may use the conservative project's rate of return as the MARR. The manager will only implement the new project if its anticipated return exceeds the MARR by at least the risk premium of the new project. The hurdle rate is usually determined by evaluating existing opportunities in operations expansion, rate of return for investments, and other factors deemed relevant by management. A risk premium can also be attached to the hurdle rate if management feels that specific opportunities inherently contain more risk than others that could be pursued with the same resources. A common method for evaluating a hurdle rate is to apply the discounted cash flow method to the project, which is used in net present value models. The hurdle rate determines how rapidly the value of the dollar decreases out in time, which, parenthetically, is a significant factor in determining the...
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...OVERCOMING MY BIGGEST LIFE HURDLE: BECOMING A SINGLE MOM Kiera Bronson Herzing University Life has a funny way of slowing you down when you’re cruising in the fast lane. I was living a carefree life; college was the only thing on my mind. I was fully involved in my schoolwork and I always had to make perfect grades. Being in a relationship, let alone having a child, was the furthest thing from my mind. My mother always said that even if it doesn’t look or feel good, it’ll always workout for my good. Becoming a mother was the scariest, confusing, and most important thing I've done in my life, but being a single mother was too much to handle. After my freshman year of college I decided I needed a change of scenery. I moved to Arlington, VA since my dad and boyfriend lived there. A couple of months into my sophomore year I got some news during a routine checkup that was going to change my life forever. I was pregnant and at 19 about to be someone’s mother. I didn’t know what to do. Without my mom being there I am one hundred percent sure that I would've lost my mind. After I found out everything was going great, we went to all the doctor’s appointments together. He was there every step of the way, it seemed like we were in it together forever, or so I thought. He became distant and I began to realize he wasn’t who he said he was Coming around everyday turned into every other day and all the phone calls turned into text messages. I was five months pregnant with our daughter...
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...Seven of the hurdles that need to be examined, in a management sense, are: 1. Cost overruns How much will they actually be and who will pay for them? Past experience says there will be cost overruns; moreover, many of those extra costs are often hidden from the public by being shifted to other budgets. Infrastructure costs are but one example of this. It is important that a tight rein on costs be initiated from the outset and that oversight be put in place. Scrutiny of estimates and the awarding of contracts by outsiders are essential. Another aspect of the issues in this area is determining how to ensure transparency. 2. The future use of sporting venues Using these venues once the games end can pose many problems; for example, some are so large that they will have to be reduced in size if they are to be profitable. Others are specific to sports that may attract little attention. There is a history of Olympic ‘white elephants’ that stand empty for years. Can someone find a way to move these elephants toward social benefit or commercial profit? 3. Transformation of Olympic housing to public housing Questions abound. What planning needs to be done to ensure that the housing constructed for the athletes actually will be used as mixed or affordable housing after the events? Will the housing for the athletes who participate in the Paralympics be set aside as housing for the elderly and disabled? What will be done with the massive cafeterias set up to feed those involved in the...
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...Corporate Investment Decision Practices And the Hurdle Rate Premium Puzzle Iwan Meier and Vefa Tarhan1 February 27, 2006 Abstract We survey a cross-section of 127 companies to shed light on various dimensions of the investment decisions. The questions posed by our survey examine the hurdle rates firms use, calculations of project related cashflows, the interaction of cashflows and hurdle rates, and the determinants of firms’ capital structure policies. Unlike previous studies which examine investment decisions by either using survey data or data obtained from financial tapes, we use both sets of data. This approach produced one of our primary findings that there is a hurdle rate premium puzzle, in that hurdle rates used by our sample of firms exceed their cost of capital that we calculate using Compustat data by 5%. We investigate the determinants of the hurdle premium in question. Additionally, we find that both systematic and to a lesser extent unsystematic risk play a role in determining the hurdle rates. Furthermore, our findings show that while firms use discounted cashflow methods in evaluating projects, they do not always appear to handle the cashflow dimension of their investment decisions in a consistent manner. Finally, we uncover evidence that firms use the various financing alternatives available to them in the order predicted by the pecking-order hypothesis. However, some of the variables affiliated with the trade-off model also appear to play a role in...
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...Fragile Administration is a big hurdle for Pulse Polio Immunization program. Vijay, 1 Fragile Administration is a big hurdle for Pulse Polio Immunization program. Gautam Vijay Johns Hopkins Carey Business School Author Note This paper is prepared as a review of Pulse Polio Immunization Program monitored by the author on behalf of WHO-INDIA as an external monitor. FRAGILE ADMINISTRATION…. Vijay, 2 Introduction Year 2007, Pulse Polio Immunization Program was conducted in the Northern part of Gujarat, a state/province in the western part of India. In past few years, despite of repeated periodical Pulse Polio Immunization programs, Government had failed to curb the menace of Polio in this region. This review points out the various loci of laxity observed, while monitoring the program as an External Monitor on behalf of WHO – India, under following headings: - 1. Polio – long standing challenge 2. Emergence of Pulse Polio 3. Role of External Monitors 4. Personal experience with the programme in North Gujarat in 2007 Polio – long lasting challenge Polio, also known as Poliomyelitis is a viral contagious disease, caused by Polio virus. It is an intestinal virus which attacks the nervous system. The disease is contracted through contact with contaminated feces or through airborne droplets in food and water. Port of entry into the human body is via nostrils or oral cavity, the virus then reaches the intestines. After incubation it enters...
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...Rick Phillips thought on the method to calculate hurdle rate or WACC is the most aligned with industry standards and would be the most financially beneficial to the company overall. The current method that Teletech Corporation is using for hurdle rate is an overall average for the company; all segments combined using an averaged beta for the company, regardless of the risk of each division. If the companies risk level was very similar for each division this would be an appropriate method per industry standards, but due to the varying risk with each division the hurdle rate should be calculated separately for each division and financial decisions for capital investment based upon these hurdle rates. If you break the hurdle rates out for each division it shows that the Services division has a hurdle rate of 8.8%, using market value available date and the Products and Systems division has a hurdle rate of 10.4%, using market value data of similar risk companies. Comparing these to the averaged company hurdle rate of 9.3% shows that the services division’s capital projects would bring a higher rate of return to the company than the P&S divisions; even though this would not be seen if you were only looking at an average. The P&S division projects could actually have negative returns based on the division hurdle rates. This is what Rick Phillips was trying to express by presenting his graph of constant versus risk adjusted hurdle rates. The company is also overvaluing the P&S...
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....CHAPTER 10 Coolbrook Company has the following information available for the past year: | | River Division | Stream Division | Sales revenue | $ | 1,200,000 | $ | 1,800,000 | Cost of goods sold and operating expenses | | 900,000 | | 1,300,000 | | | | | | Net operating income | $ | 300,000 | $ | 500,000 | | | | | | Average invested assets | $ | 1,200,000 | $ | 1,800,000 | | The company’s hurdle rate is 6 percent. | | Required: | 1. | Calculate return on investment (ROI) and residual income for each division for last year. (Do not round your intermediate calculations. Round "ROI" answers to 1 decimal place.) | River Division | Stream Division | ROI | +/-1%25.0 | % | +/-1%27.8 | % | Residual Income | $228,000 | | $392,000 | | | | | | | 2. | Recalculate ROI and residual income for each division for each independent situation that follows: | a. | Operating income increases by 10 percent. (Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.) | | | | | River Division | Stream Division | ROI | +/-1%27.50 | % | +/-1%30.56 | % | Residual Income | $258,000 | | $442,000 | | | b. | Operating income decreases by 10 percent. (Do not round your intermediate calculations. Round "ROI" answers to 1 decimal place.) | | River Division | Stream Division | ROI | +/-1%22.5 | % | +/-1%25...
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...h case Applied corporate finance | TeleTech Corporation 2005 | Case Analysis | | | | | CONTENTS 1. Executive Summary 2. Introduction 3. Analysis 4. Conclusion 1. Executive Summary Teletech Corporation is one of the frontrunners in Telecommunications industry. The company is mainly concentrated along two lines of business, the first being Telecommunication services and the second being Products and Systems (P&S) Segment. Telecommunication services accounted for 75% of the market value of the assets and the other 25% was occupied by P&S, however the ROC for the year 2004 for P&S is greater than Telecommunication services with a noticeable difference of 1.9%. The Current Book Value of Net Assets is$ 16 billion – 11.4 to Telecommunication, 4.6 to P&S. The Telecommunications Services segment currently has 7 million customers mainly belonging to the Southwest and Midwest and is considered as the dominant service providers of consumer satisfaction and product quality. It also has its revenues growing at an average rate of 3% (2000-2004). Its 2004 figures indicated a NOPAT of 1.18 billion, Net Assets: 11.4 Billion, Revenues: 11 Billion. Its Capital Budget is between 1.5 and 2 billion every year for 10 years and there is No tax rate relief for capital investments. Some factors that are playing to the advantage of this segment include Teletech expanding via acquisitions in Latin America, an overall deregulation of...
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...Analysis Teletech 2005 WACC and Hurdle Rate: Risk drives required returns and is a fundamental concept when determining whether or not a company is providing appropriate returns to its shareholders. Teletech’s policy was to use a uniform hurdle rate across segments. This policy works well if each potential investment has the same risk. Unfortunately for Teletech, investments differ in their level of risk and therefore in their required rates of return. To adequately assess potential investments, Teletech should implement a hurdle rate for each segment and potentially risk-adjust these hurdle rates for projects within each segment. As Teletech’s EVP of Telecommunications Services points out in his graph, a single hurdle rate for varying risk segments can be misleading and cause severe financial damage. Specifically it can lead to profitable projects being rejected and unprofitable projects being approved. In either case, shareholder value is not maximized. Exhibit 1 shows our WACC calculation for the Telecommunications Services (TS) and Product and Systems (PS) segments to be 8.5% and 11.7% respectively. Under Teletech’s single hurdle rate philosophy, projects in the TS segment would be rejected if ROC is projected to be below 9.3% even though they would be adding value if above 8.5%. Possibly even more detrimental, projects in the PS segment would be approved if ROC is above 9.3% even though they would be destroying value if below 11.7%. Additionally, the single...
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...their industry. So in 2005 a raider named, Victor Yossarian, bought a 10% stake in Teletech and demanded two seats on the board. Yossarian then sent a letter to Teletech’s CEO saying the firm was misusing resources and not maximizing shareholders wealth. Ironically the company’s returns were already under scrutiny internally. Most of the issues had to do with the company’s hurdle rate, which was used for NPV analysis and to evaluate performance. The firm was split between wanting to change to a risk adjusted hurdle rate and keeping the current policy. The current policy was to use a constant hurdle rate of 9.30% for all projects and that rate was based on the WACC for the corporation as a whole. So this lead me to a series of questions. What is the hurdle rate? How did Teletech apply it? What are the pros and cons of risk adjusted hurdle rates? What are the risked adjusted rates? What should Teletech do in response? What is the Hurdle rate? How is Teletech applying it? According to Investopedia, a hurdle rate is the minimum rate of return on an investment required by management. In this case, the hurdle rate is the discount rate used for assessing both Teletech’s...
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...)(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...
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...affect firm value. b. Explain how the single hurdle rate currently used by Northern Forest Products can change the risk structure of the company. For example, think about what would happen if the Plastic Products Division received a disproportionately high level of funding because their returns exceed the company hurdle rates (its growth rate substantially exceeds the corporate average). Assuming that the risk of the division remains unchanged, what effect would this have, over time, on NFP’s corporate beta and on the overall cost of capital? ______________________________ a. In reality, business firms may have various divisions with different level of risk and capital structure. Risk adjustments therefore are important because each project would not be properly evaluated if its hurdle rate was based on the firm’s overall risk only. In other words, the firm’s hurdle rate should be adjusted to better reflect the risk of each division in which it considers investing. Without proper risk adjustments, the firm’s stock may lose value by taking on unacceptable high-risk projects or rejecting acceptable low-risk projects. Failure in adjusting risk for divisions is often due to poor financial management performance, which later brings about incorrect estimate of the division’s return. This might hit the firm hard. b. The single hurdle rate currently used by NFP can dramatically change the risk structure of the company. The hurdle rate is the minimum rate of return. Nevertheless...
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...has decided to apply a hurdle rate of 9.30% to all capital projects in the evaluation of the performance of business units. In my opinion, this is a mistake that is costing the company money. They should be using separate hurdle rates for the two different market segments because the markets they serve are different in terms of risk. In calculating the WACC for each segment, I did the following: Telecommunications Services Products and Systems WD 0.271 WD 0.092 WS 0.729 WS 0.908 RD 5.74 RD 7.47 RS 10.34 RS 11.99 Beta 1.04 Beta 1.34 RM-RF 5.5 RM-RF 5.5 RM 10.12 RF 10.12 RF 4.62 RF 4.62 1-T 0.60 1-T 0.60 WACC 8.47 WACC 11.30 I used the average beta of the Telecommunications Services Industry in calculating the WACC for the Telecommunications Services segment. For the Products and Systems segment, I used the average of the Telecommunications Equipment Industry and the Computer and Network Equipment Industry. I also made the assumption that RF and Rm for each segment would be equivalent to the Teletech as a whole. You Can see from the charts that the Products and Systems side has a significantly higher WACC than the Telecommunications segment, meaning there is less risk associated with the Telecommunications segment. Rick Phillips prepared a graph that illustrates a constant hurdle rate for Teletech versus where he believes the hurdle rate should be for each of the two segments that make up Teletech. Based on the constant hurdle rate, Teletech would...
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...To: Margaret Weston From: Bernard Ingles (Alex Lafond, Kenneth Harper, Mitchell McMahon) Subject: Theoretical Overview of Multiple Hurdle Rates Date: Executive Summary: Teletech Corporation’s needs to determine hurdle rates for each of the business’s two main segments: services and products and systems (P&S). Victor Yossarian has made valid points in regards to our misuse of company resources as well as our unsubstantial returns. In order to obtain enough capital for the upcoming years projects (roughly $2 billion), Teletech must re-evaluate current strategies in both segments and consider a spin-off of the Products & Systems segment. The company’s current 9.30% corporate-wide hurdle rate needs to be reconfigured in order to analyze potential project undertakings. Teletech should use hurdle rates that better represent the risks associated in each segment. The current hurdle rate is not maximizing shareholder and economic value due to the misallocation of company capital. In this case it is presumed that the firm is transparent and the value of the whole enterprise is simply the sum of its parts (MVdebt + MVequity). Analysis: Teletech must apply two different hurdle rates to accommodate for the risk in each segment. The WACC for the Services segment is 8.47% and the WACC for the Products and System segment is 11.40% (Exhibit 1). To estimate beta and capital structure weighting for the calculation of WACC, we used a comparable analysis for companies...
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...Pioneer Petroleum Corporation Ryan Rhodes Dr. Bacon February 18, 2009 Table of Contents Introduction Background……………………………………………………………….. Pg. 3 Major Problems……………………………………………………………. Pg. 5 Analysis Alternative Courses of Action………………………………………………Pg. 6 Analysis of Alternatives……………………………………………………. Pg. 6 Conclusion Suggested Course of Action………………………………………………... Pg. 8 Introduction Background Pioneer Petroleum was formed in 1924 with the merger of several formerly independent firms which operated in the oil refining, pipeline transportation, and industrial chemical fields. Through the next sixty years, the company integrated vertically into exploration and production of crude oil and marketing refined petroleum products and horizontally into plastics, agricultural chemicals, and real-estate development. It was restructured in 1985 as a hydrocarbons-based company, concentrating on oil, gas, coal and petrochemicals. Pioneer at the time was one of the lowest cost refiners on the West Coast and had an extensive West Coast marketing network. In 1990, total revenue exceeded $15.6 billion and net income was over $1.5 billion. Pioneer was subject to extremely volatile prices in oil. Because of this, the management of Pioneer emphasized the importance of operational and financial flexibility to respond to any price swings. Pioneer spent about $3.1 billion on capital expenditures in 1990, and the forecast for 1991 was approximately $4.5 billion...
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