CASE STUDY OF TELETECH

CORPORATION, 1996
University of Virginia
Date 12-05-2019
 Table of Contents
Question No. 01...........................................................................................................................................3
1.1 How does Teletech currently use the hurdle rate?......................................................................3
1.2 What are Risk Philips argument for the use of a risk-adjusted hurdle rate system?....................3
1.3 Why are Helen Buono’s arguments against the system?.............................................................3
1.4 How does Teletech currently use the hurdle rate?......................................................................4
2 Questions No. 02.................................................................................................................................4
2.1 2.1 Please estimate segment WACCs for Teletech (see the worksheet in case Exhibit 1.)..........5
2.2 2.2. As you do this, make careful note of points of judgment in the calculation.........................5
2.3 2.3. What are the implications for capital allocation at Teletech of Rick Phillips’s graph (case
Figure 2)?.................................................................................................................................................5
3 Questions No. 03.................................................................................................................................6
3.1 3.1. Would allocating capital on the basis of the risk-adjusted hurdle rate system create or
destroy value?.........................................................................................................................................6
4 Questions No. 04.................................................................................................................................7
4.1 4.1. Interpret Rick Phillips’s graph (Figure 2 in the case).............................................................7
4.2 How does the choice of constant versus risk-adjusted hurdle rates affect the evaluation of
Teletech’s two segments?.......................................................................................................................7
4.3 What are the implications for Teletech’s resource allocation strategy?......................................8
4.4 What are the two segments’ WACCs? Has products and Systems destroyed value?..................8
4.5 What about the telecommunications Services?..........................................................................8
5 Questions No. 05.................................................................................................................................9
5.1 Do you agree that” all money is green”? What are the implications of this view?......................9
5.2 What are the arguments in favor? What are the arguments opposed to it?.............................10
5.3 Do you have any concerns about the Teletech’s possible implementation of a risk-adjustment
hurdle rate system?...............................................................................................................................10
6 Questions No. 06...............................................................................................................................11
6.1 Is Helan Buono right that management would destroy value, if all the firm’s assets were
redeployed into only the telecommunications business segment?.......................................................11
6.2 Why or why not? Prepare a numerical example to support your view......................................11
7 Questions No. 07...............................................................................................................................12
7.1 Has Products and systems destroyed value? What evidence or illustrations can you give to
support your opinion?...........................................................................................................................13
8 Questions No. 08...............................................................................................................................14
8.1 What should Teletech say to Rick Phillips?................................................................................14
8.2 How about the Helen Buono? Or to Victor Yossarian?..............................................................14
 Question No. 01
1.1 How does Teletech currently use the hurdle rate?
The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm

1.2 What are Risk Philips argument for the use of a risk-adjusted hurdle
rate system?
The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm

1.3 Why are Helen Buono’s arguments against the system?

The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm
1.4 How does Teletech currently use the hurdle rate?

The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm

2 Questions No. 02
2.1 2.1 Please estimate segment WACCs for Teletech (see the worksheet in
case Exhibit 1.)
The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm

2.2 2.2. As you do this, make careful note of points of judgment in the
calculation.
The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm

2.3 2.3. What are the implications for capital allocation at Teletech of Rick
Phillips’s graph (case Figure 2)?
The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm
 3 Questions No. 03

3.1 3.1. Would allocating capital on the basis of the risk-adjusted hurdle rate
system create or destroy value?

The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm
 4 Questions No. 04

4.1 4.1. Interpret Rick Phillips’s graph (Figure 2 in the case).

The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm

4.2 How does the choice of constant versus risk-adjusted hurdle rates affect
the evaluation of Teletech’s two segments?

The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm
4.3 What are the implications for Teletech’s resource allocation strategy?

The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm

4.4 What are the two segments’ WACCs? Has products and Systems
destroyed value?

The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm

4.5 What about the telecommunications Services?

The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm

5 Questions No. 05

5.1 Do you agree that” all money is green”? What are the implications of this
view?

The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm
5.2 What are the arguments in favor? What are the arguments opposed to
it?

The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm

5.3 Do you have any concerns about the Teletech’s possible implementation
of a risk-adjustment hurdle rate system?

The hurdle rate used in the assessments of economic profit and NPV had been the focus of considerable
debate in recent months. This rate was based on an estimate of Teletech’s weighted- average cost of
capital (WACC). Management was completely satisfied with the intellectual relevance of a hurdle rate as
an expression of the opportunity cost of money. The notion that the WACC represented this opportunity
cost had been debated. Its measurement was never considered entirely scientific, but it had been
accepted. For instance, Teletech was “split-rated” between AA− and A+. An investment banker recently
suggested that, at those ratings, new debt funds might cost Teletech 7.03% (about 4.22% after a 40% tax
rate). With a beta of 1.041, the cost of equity might be about 11.77%. At market-value weights of 18%
for debt and 82% for equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation.
The hurdle rate of 10.41% was applied to all investment and performance measurement analyses in the
firm
 6 Questions No. 06

6.1 Is Helan Buono right that management would destroy value, if all the
firm’s assets were redeployed into only the telecommunications business
segment?

The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm

6.2 Why or why not? Prepare a numerical example to support your view.
The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm

7 Questions No. 07
7.1 Has Products and systems destroyed value? What evidence or
illustrations can you give to support your opinion?

The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm
 8 Questions No. 08

8.1 What should Teletech say to Rick Phillips?

The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm

8.2 How about the Helen Buono? Or to Victor Yossarian?

The hurdle rate used in the assessments of economic profit and NPV had been the focus of
considerable debate in recent months. This rate was based on an estimate of Teletech’s weighted-
average cost of capital (WACC). Management was completely satisfied with the intellectual
relevance of a hurdle rate as an expression of the opportunity cost of money. The notion that the
WACC represented this opportunity cost had been debated. Its measurement was never
considered entirely scientific, but it had been accepted. For instance, Teletech was “split-rated”
between AA− and A+. An investment banker recently suggested that, at those ratings, new debt
funds might cost Teletech 7.03% (about 4.22% after a 40% tax rate). With a beta of 1.041, the
cost of equity might be about 11.77%. At market-value weights of 18% for debt and 82% for
equity, the resulting WACC would be 10.41%. Exhibit 1 summarizes the calculation. The hurdle
rate of 10.41% was applied to all investment and performance measurement analyses in the firm