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 everybody? poor 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
Several questions for you here: 1. the essential 3 questions seem to be those in the Conclusion re: hurdle rates; whether or not Products & Systems was underperforming; and how the company should respond? 2. What are the definitions of Rf and Rm-Rf (in the exhibits)? 3. Finally, the company can respond in a number of ways, depending on factors outside the scope of this case — such as how concentrated the Teletech shares are in managements’ or other investors hands. There’s a lot we don’t know in this case, including how bad the write-offs have been in the newer Products & Services business.
The question is: do the two business units have different costs-of-capital? THE MARKETS FOR TS AND P&S The ideal situation is to find several competing companies and judge the beta or capital market risk for them. Considered to be the best way to judge company-related risk, this is still an imperfect process. Even taking two closely-competitive semiconductor companies such as Intel (NASDAQ: INTC) and Advanced Micro Devices (NYSE: AMD), you’ll find many things are the same (percent of R&D spending; gross margins on major product lines; percent of sales & marketing spending).
— and you’ll find many things different (share of microprocessor markets; markets for new product development; customers; capital structure). Bernard Ingles’ memo to CFO Margaret Weston in the Teletech case makes mention of this in his last point but really makes no mention of what companies would provide likely comparisons — or if the companies are publicly-traded. In terms of equity, we know only that the company has a low aggregate beta of 1. 04. However, we do have a good idea of what debt risks are — and the portion of capitalization that’s allocated to Telecommunications Services (TS) and Products & Services
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