Daniel Kim
111864492
BMGT440-Section0301
Teletech Corporation Case Study
Teletech Corporation is a company that provides telephone service to more than 7 million
customers in the United States and its headquarters is located in Dallas, Texas. The Chief
Executive Officer of Teletech Maxwell Harper received a letter by a billionaire by the name of
Victor Yossarian about a purchase that he had made of 10 percent of stake early on. Victor stated
in his letter that Teletech was not using its fund appropriately and they were not earning an
acceptable return. Yossarian suggested that some things needed to change in order to fix the
situation. One of the suggestions he presented was that Teletech needed to sell its products and
Systems Department and concentrate on generating value for its shareholders through attaining
greater returns.
As this suggestion was made, the executives of Teletech were having talks about the hurdle
rate being used by the company in order to evaluate their performance which obviously lead to
returns.
The hurdle rate that has been a very important part of the talks between executives of
Teletech has been used to estimate the weighted average cost of capital. Exhibit 1 explains the
hurdle rate of 9.30% after the calculations made by an investment banker. The calculations
included after tax cost of debt, cost of equity, weight of debt and weight of equity, which are all
listed in exhibit 1.
For the following two sections, Telecommunications Services and Products and Systems
weighted average cost of capital also was calculated. According to calculations, the weighted
average cost of capital for Telecommunications Services is 8.55%, which is relatively close to the
9.30% of the Corporate WACC. On the other hand the WACC for Products and Systems is 11.54%,
which is also very close of the 9.30% of the corporate WACC.
After making these calculations, one can determine that it is best to use these three rates to
measure instead of only one WACC, in order to facilitate judgment with the changing environment
and circumstances that Teletech is facing at the moment. In order to benchmark with every other
area is better for the company to start measuring performance with one specific WACC and
evaluate that department according to their percentage. Going back to the beginning of the case,
Yossarian was right in terms of the products and systems area underperforming, which is
something that Teletech can now address as they have an appropriate average for their WACC.
This is an eye opener for the company as they can confirm the performance of this are. It is obvious
that by only looking at the corporate WACC executives will think that they are performing better
than the actual company is doing. The other two percentages provide clear facts on the reality of
the whole company, which will be better for executives to evaluate for future decisions with
investors.