1. What are Rick Phillips’s arguments for the use of the risk-adjusted hurdle-rate system? What are Buono’s arguments against the system?

2. What are the implications of Phillips’s graph for capital allocation at Teletech (case Figure 2)? Would allocating capital on the basis of the risk-adjusted hurdle-rate system create or destroy value?

3. What are the WACCs of the two segments? Has Products and Systems destroyed value? What about Telecommunications Services?

4. Do you have any other concerns about Teletech’s possible implementation of a risk-adjusted hurdle-rate system? 

5. What should Teletech say to Phillips? What should the company say to Buono? What about to Yossarian?

In October 2005, the chief financial officer (CFO) of a telecommunications company needed to fashion a response to a corporate raider who claimed that a major business segment of this company should have been sold because it was not earning a satisfactory rate of return. The case recounts the debate within the company over the use of a single hurdle rate to evaluate all segments of the company versus a risk-adjusted hurdle-rate system. The tasks for the student are to resolve the debate, estimate the weighted-average costs of capital (WACC) for Teletech’s two business segments, and respond to the raider’s assertions.

This case was prepared to serve as part of an introduction on estimating investors’ required rates of return. It would best follow one or two teaching sessions introducing techniques for estimating WACC. The required numerical calculations are light, although some of the subtleties about the use of risk-adjusted hurdle rates will require time for the novice to absorb.

The case can be used to pursue a variety of teaching objectives, including the following:

• Extend risk-return (i.e., mean-variance) analysis to corporate finance.
• Survey classic arguments for and against the use of risk-adjusted hurdle-rate systems.
• Assess the assumptions and limitations of risk-adjusted hurdle rates.
• Exercise the estimation of segment WACCs.
• Consider possible organizational barriers to the implementation of risk-adjusted hurdle rates.