FIN 450 Guna Fibers ltd case

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timer Asked: Feb 2nd, 2019
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Question Description

Format for Individual Cases (2 Page MAX – Single Spaced)

Individual case analyses are equivalent to preparing an executive summary of the problem. The following format is REQUIRED:

I.Title Page

II. Recommendation - Short Version

A solution must be recommended and supported by rational arguments.It is important to be able to articulate why a certain solution is recommended and to be able to defend it.There is usually not one correct solution to these case problems. But, there are incorrect solutions. For example, solutions that violate economic principles, or are inconsistent with financial theory, or are based on inconsistent assumptions, or violate ethical or legal standards are not acceptable solutions.Solutions not supported by data are not acceptable solutions.

III.Statement Problem – Do not repeat case – just state the problem to be solved.

[3 Sentences at most]- For this case, lack of cash flow b/c excise taxes

This statement should briefly outline the problem presented in the case. Case details do not need to be repeated.The student should assume that the instructor has read the case. It is analogous to writing a report for a supervisor.

IV.Analysis of Problem - Whats the problem? --> Sales forecast reasonable, running out of cash, problem with A/R & A/P, Etc. for Exhibit 3 (TM), Exhibit 4 (OM), and Exhibit (Custom)

This statement should briefly outline the problem presented in the case. Case details do not need to be repeated.The student should assume that the instructor has read the case. It is analogous to writing a report for a supervisor. DO NOT OUTLINE PROCEDURES.

5. Alternative Solutions- (Exhibit 3 (TM), Exhibit 4 (OM), and Exhibit (Custom)).

This section of the case analysis is where alternative solutions are explored. Pros and cons of different solutions should be presented. Application of theoretical models will be done in this section. Quantitative analysis should be done in exhibits and tables and referenced in this section.

Exhibits/Tables/Charts – Attached. Must be labeled and organized with the paper. For example, Exhibit 1 has to be the first exhibit discussed in the paper. You would never start with Exhibit 4 for example.

FIN 450 Guna Fibers ltd case
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FIN 450 Guna Fibers ltd case
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This spreadsheet supports STUDENT analysis of the case “Guna Fibres, Ltd.” (Case 12). This spreadsheet was prepared by Michael J. Schill, Associate Professor of Business Administration. Copyright © 2013 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. For customer service inquiries, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, posted to the Internet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Feb. 4, 2013 Exhibit 5 GUNA FIBRES, LTD. Monthly Financial Statement Forecast (in thousands of Indian rupees) Assumptions Excise Tax Rate Cost of Goods Sold / Gr Sales Annual Operating Expenses / Annual Gr Sales Depreciation / Gross PP&E Interest Rate on Borrowings (and Deposits) Income Tax Rate Dividends Paid (000s in March, June, Sep, Dec) 15% 73.7% 6.0% 10% 14.5% 30% 500 Minimum Cash Balance (000s) Accounts Receivable Collection In One Month In Two Months Purchases / Gr Sales in Two Months Direct Labour / Purchases Last Month Capital Expenditures (every third month) Accounts payable / Purchases 750 40% 60% 55% 34% 350 50% Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 2,717 2,214 2,616 2,892 4,447 8,804 13,885 17,588 16,315 8,576 5,031 4,447 3,531 2,767 392 434 667 1,321 2,083 2,638 2,447 1,286 755 667 530 415 2,224 2,458 3,780 7,483 11,802 14,950 13,868 7,290 4,276 3,780 3,001 2,352 1,928 2,131 3,277 6,489 10,233 12,962 12,024 6,321 3,708 3,277 2,602 2,039 296 327 503 995 1,569 1,987 1,844 969 569 503 399 313 454 454 454 454 454 454 454 454 454 454 454 454 84 84 87 87 87 90 90 90 93 93 93 96 10 6 3 48 123 216 294 266 149 62 27 10 -253 -218 -42 406 905 1,227 1,005 158 -128 -107 -175 -248 -76 -65 -13 122 271 368 302 47 -38 -32 -53 -74 -177 -152 -29 284 633 859 704 111 -89 -75 -123 -173 500 500 500 500 Full year 2012 90,899 13,635 77,264 66,993 10,272 5,454 1,074 1,213 2,531 759 1,771 2,000 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Cash 762 750 750 750 750 750 750 750 750 750 750 750 750 Accounts Receivable (6) 2,673 2,773 3,291 5,011 10,301 17,996 24,748 25,697 17,194 9,006 6,295 5,028 3,715 Inventory 3,450 2,063 2,377 4,774 7,568 9,605 8,905 4,648 2,698 2,377 1,873 1,453 1,802 Total Current Assets 6,885 5,586 6,418 10,535 18,619 28,351 34,403 31,095 20,642 12,133 8,918 7,231 6,267 Gross Plant, Property, and Equip (7) 10,096 10,096 10,096 10,446 10,446 10,446 10,796 10,796 10,796 11,146 11,146 11,146 11,496 Accumulated Depreciation 1,484 1,568 1,652 1,739 1,826 1,913 2,003 2,093 2,183 2,276 2,369 2,462 2,558 Net Plant, Property, and Equipment 8,612 8,527 8,443 8,706 8,619 8,532 8,792 8,702 8,612 8,869 8,777 8,684 8,938 Total Assets 15,497 14,113 14,861 19,241 27,239 36,883 43,195 39,797 29,255 21,002 17,695 15,915 15,204 2012 9,762 133,727 53,594 197,083 138,943 26,129 112,814 309,898 Accounts Payable (8) Note Payable (9) Accrued Taxes (10) Total Current Liabilities Shareholders' Equity (11) Total Liabilities & Equity 1,384 1,223 971 761 935 12,323 5,170 2,221 827 690 349 0 -32 -85 -159 14,056 6,393 3,160 1,503 1,466 15,199 14,610 14,534 14,412 13,738 29,255 21,002 17,695 15,915 15,204 25,240 101,101 -330 126,011 183,887 309,898 Inventory Detail Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Purchases (12) 1,439 1,591 0 2,446 4,842 7,637 9,673 8,973 4,717 2,767 2,446 1,942 1,522 1,871 Direct Labour & Other Mftg Costs (13) 489 541 0 832 1,646 2,596 3,289 3,051 1,604 941 832 660 517 Cost of Goods Sold 1,928 2,131 3,277 6,489 10,233 12,962 12,024 6,321 3,708 3,277 2,602 2,039 2012 48,836 16,509 66,993 Gross Sales (1) Excise Taxes (2) Net Sales Cost of Goods Sold Gross Profit Operating Expenses (3) Depreciation (4) Interest Expense (5) Profit Before Taxes Income Taxes Net Profit Dividend 822 0 1,223 2,421 3,818 798 489 232 3,955 10,150 -90 -166 -231 -244 -122 1,530 323 1,223 6,133 13,846 13,967 13,790 13,638 13,108 13,392 15,497 14,113 14,861 19,241 27,239 4,837 17,872 149 22,858 14,026 36,883 4,487 24,324 0 28,810 14,385 43,195 2,358 22,049 302 24,709 15,088 39,797 Jan-13 Feb-13 3,401 3,616 -4% 34% 74% Inventory (14) 3,450 2,063 2,377 4,774 7,568 9,605 Notes: (1) Follows forecast in Exhibit 2 (2) Gross Sales * Exercise Tax Rate (3) Annual Operating Expenses / 12 (4) Gross PPE * Depreciation Rate / 12 (5) Notes Payable (t - 1) * Interest Rate / 12 (6) AR(t - 1) + GSales(t) - 40% * GSales(t - 2) - 60% x GSales(t - 2) (7) GPPE(t -1) + Capex(t) (8) 50% * Purchases(t) (9) Total Assets - AP - AccTax - ShrEquity (10) AccTax(t - 1) + IncTax(t) or 0 if positive balance and month of quarterly payment (11) ShrEquity(t - 1) + NetProfit(t) - Dividend(t) (12) 55% * GSales(t + 2) (13) 35% * Purchases(t-1) (14) Inventory(t - 1) + Purchases(t) + Direct Labour(t) - COGS(t) 8,905 4,648 2,698 2,377 1,873 1,453 1,802 53,594 Exhibit 5 GUNA FIBRES, LTD. Monthly Financial Statement Forecast (in thousands of Indian rupees) Assumptions Excise Tax Rate Cost of Goods Sold / Gr Sales Annual Operating Expenses / Annual Gr Sales Depreciation / Gross PP&E Interest Rate on Borrowings (and Deposits) Income Tax Rate Dividends Paid (000s in March, June, Sep, Dec) 15% 71.0% 6.0% 10% 14.5% 30% 500 Minimum Cash Balance (000s) Accounts Receivable Collection In One Month In Two Months Purchases / Gr Sales in Two Months Direct Labour / Purchases Last Month Capital Expenditures (every third month) Accounts payable / Purchases 750 40% 60% 55% 29% changed from 34% 350 50% Nov-11 Dec-11 Jan-12 2,717 2,214 2,616 392 2,224 1,856 368 454 84 10 -181 -54 -127 Feb-12 2,892 434 2,458 2,052 406 454 84 35 -167 -50 -117 Mar-12 4,447 667 3,780 3,155 625 454 87 96 -12 -4 -9 500 Apr-12 May-12 8,804 13,885 1,321 2,083 7,483 11,802 6,246 9,851 1,237 1,951 454 454 87 87 166 224 530 1,185 159 355 371 829 Jun-12 17,588 2,638 14,950 12,479 2,471 454 90 261 1,666 500 1,166 500 Jul-12 16,315 2,447 13,868 11,575 2,292 454 90 269 1,479 444 1,035 Aug-12 8,576 1,286 7,290 6,085 1,205 454 90 199 461 138 323 Sep-12 5,031 755 4,276 3,569 707 454 93 94 65 20 46 500 Oct-12 4,447 667 3,780 3,155 625 454 93 46 32 10 22 Nov-12 3,531 530 3,001 2,505 496 454 93 51 -103 -31 -72 Dec-12 2,767 415 2,352 1,963 389 454 96 84 -245 -74 -172 500 Full year 2012 90,899 13,635 77,264 64,493 12,771 5,454 1,074 1,534 4,710 1,413 3,297 2,000 Dec-11 Jan-12 Cash 762 750 Accounts Receivable (6) 2,673 2,773 Inventory 3,450 7,055 Total Current Assets 6,885 10,578 Gross Plant, Property, and Equip (7) 10,096 10,096 Accumulated Depreciation 1,484 1,568 Net Plant, Property, and Equipment 8,612 8,527 Total Assets 15,497 19,106 Feb-12 750 3,291 11,453 15,494 10,096 1,652 8,443 23,937 Mar-12 750 5,011 14,748 20,509 10,446 1,739 8,706 29,216 Apr-12 May-12 750 750 10,301 17,996 14,952 11,550 26,003 30,297 10,446 10,446 1,826 1,913 8,619 8,532 34,622 38,829 Jun-12 750 24,748 5,522 31,020 10,796 2,003 8,792 39,812 Jul-12 750 25,697 396 26,843 10,796 2,093 8,702 35,545 Aug-12 750 17,194 762 18,706 10,796 2,183 8,612 27,318 Sep-12 750 9,006 3,642 13,398 11,146 2,276 8,869 22,267 Oct-12 750 6,295 6,937 13,981 11,146 2,369 8,777 22,758 Nov-12 750 5,028 10,882 16,660 11,146 2,462 8,684 25,343 Dec-12 750 3,715 15,368 19,833 11,496 2,558 8,938 28,771 2012 9,762 133,727 106,717 250,207 138,943 26,129 112,814 363,021 Accounts Payable (8) Note Payable (9) Accrued Taxes (10) Total Current Liabilities Shareholders' Equity (11) Total Liabilities & Equity 822 2,500 798 2,910 -90 -144 1,530 5,265 13,967 13,840 15,497 19,106 2,500 7,909 -195 10,214 13,723 23,937 2,500 13,699 -198 16,001 13,215 29,216 2,500 18,576 -39 21,037 13,586 34,622 2,500 21,598 316 24,414 14,415 38,829 2,500 22,231 0 24,731 15,081 39,812 2,500 16,485 444 19,429 16,116 35,545 2,500 7,796 582 10,879 16,439 27,318 2,500 3,782 0 6,282 15,985 22,267 2,500 4,241 10 6,751 16,007 22,758 2,500 6,929 -21 9,408 15,935 25,343 2,500 11,102 -95 13,507 15,264 28,771 30,822 138,057 568 169,447 193,574 363,021 Inventory Detail Nov-11 Dec-11 Jan-12 Purchases (12) 1,439 1,591 5,000 Direct Labour & Other Mftg Costs (13) 417 461 Cost of Goods Sold 1,856 Feb-12 5,000 1,450 2,052 Mar-12 5,000 1,450 3,155 Apr-12 May-12 5,000 5,000 1,450 1,450 6,246 9,851 Jun-12 5,000 1,450 12,479 Jul-12 5,000 1,450 11,575 Aug-12 5,000 1,450 6,085 Sep-12 5,000 1,450 3,569 Oct-12 5,000 1,450 3,155 Nov-12 5,000 1,450 2,505 Dec-12 5,000 1,450 1,963 2012 60,000 16,411 64,493 Gross Sales (1) Excise Taxes (2) Net Sales Cost of Goods Sold Gross Profit Operating Expenses (3) Depreciation (4) Interest Expense (5) Profit Before Taxes Income Taxes Net Profit Dividend Jan-13 Feb-13 3,401 3,616 18% 27% 71% Inventory (14) 3,450 7,055 11,453 14,748 14,952 Notes: (1) Follows forecast in Exhibit 2 (2) Gross Sales * Exercise Tax Rate (3) Annual Operating Expenses / 12 (4) Gross PPE * Depreciation Rate / 12 (5) Notes Payable (t - 1) * Interest Rate / 12 (6) AR(t - 1) + GSales(t) - 40% * GSales(t - 2) - 60% x GSales(t - 2) (7) GPPE(t -1) + Capex(t) (8) 50% * Purchases(t) (9) Total Assets - AP - AccTax - ShrEquity (10) AccTax(t - 1) + IncTax(t) or 0 if positive balance and month of quarterly payment (11) ShrEquity(t - 1) + NetProfit(t) - Dividend(t) (12) 55% * GSales(t + 2) (13) 35% * Purchases(t-1) (14) Inventory(t - 1) + Purchases(t) + Direct Labour(t) - COGS(t) 11,550 5,522 396 762 3,642 6,937 10,882 15,368 106,717 Exhibit 5 GUNA FIBRES, LTD. Monthly Financial Statement Forecast (in thousands of Indian rupees) Assumptions Excise Tax Rate Cost of Goods Sold / Gr Sales Annual Operating Expenses / Annual Gr Sales Depreciation / Gross PP&E Interest Rate on Borrowings (and Deposits) Income Tax Rate Dividends Paid (000s in March, June, Sep, Dec) 15% 73.7% 6.0% 10% 14.5% 30% 500 Minimum Cash Balance (000s) Accounts Receivable Collection In One Month In Two Months Purchases / Gr Sales in Two Months Direct Labour / Purchases Last Month Capital Expenditures (every third month) Accounts payable / Purchases 750 40% 60% 55% 34% 350 50% Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 2,717 2,214 2,616 2,892 4,447 8,804 13,885 17,588 16,315 8,576 5,031 4,447 3,531 2,767 392 434 667 1,321 2,083 2,638 2,447 1,286 755 667 530 415 2,224 2,458 3,780 7,483 11,802 14,950 13,868 7,290 4,276 3,780 3,001 2,352 1,928 2,131 3,277 6,489 10,233 12,962 12,024 6,321 3,708 3,277 2,602 2,039 296 327 503 995 1,569 1,987 1,844 969 569 503 399 313 454 454 454 454 454 454 454 454 454 454 454 454 84 84 87 87 87 90 90 90 93 93 93 96 10 6 3 47 121 212 288 259 141 54 19 2 -253 -218 -42 406 906 1,231 1,011 165 -120 -99 -167 -239 -76 -65 -13 122 272 369 303 50 -36 -30 -50 -72 -177 -152 -29 284 635 861 708 116 -84 -70 -117 -168 500 500 500 500 Full year 2012 90,899 13,635 77,264 66,993 10,272 5,454 1,074 1,162 2,582 774 1,807 2,000 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Cash 762 750 750 750 750 750 750 750 750 750 750 750 750 Accounts Receivable (6) 2,673 2,773 3,291 5,011 10,301 17,996 24,748 25,697 17,194 9,006 6,295 5,028 3,715 Inventory 3,450 2,063 2,377 4,708 7,378 9,249 8,384 4,023 2,052 1,730 1,227 806 1,155 Total Current Assets 6,885 5,586 6,418 10,470 18,429 27,996 33,882 30,470 19,996 11,486 8,271 6,585 5,620 Gross Plant, Property, and Equip (7) 10,096 10,096 10,096 10,446 10,446 10,446 10,796 10,796 10,796 11,146 11,146 11,146 11,496 Accumulated Depreciation 1,484 1,568 1,652 1,739 1,826 1,913 2,003 2,093 2,183 2,276 2,369 2,462 2,558 Net Plant, Property, and Equipment 8,612 8,527 8,443 8,706 8,619 8,532 8,792 8,702 8,612 8,869 8,777 8,684 8,938 Total Assets 15,497 14,113 14,861 19,176 27,048 36,528 42,674 39,172 28,608 20,356 17,048 15,268 14,558 2012 9,762 133,727 48,603 192,093 138,943 26,129 112,814 304,907 Accounts Payable (8) Note Payable (9) Accrued Taxes (10) Total Current Liabilities Shareholders' Equity (11) Total Liabilities & Equity 1,384 1,223 971 761 935 11,660 4,504 1,548 146 0 353 0 -30 -80 -152 13,396 5,727 2,489 827 784 15,212 14,628 14,559 14,442 13,774 28,608 20,356 17,048 15,268 14,558 24,998 96,196 -309 120,885 184,022 304,907 Inventory Detail Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Purchases (12) 1,439 1,591 0 2,446 4,777 7,534 9,543 8,852 4,653 2,767 2,446 1,942 1,522 1,871 Direct Labour & Other Mftg Costs (13) 489 541 0 832 1,624 2,562 3,245 3,010 1,582 941 832 660 517 Cost of Goods Sold 1,928 2,131 3,277 6,489 10,233 12,962 12,024 6,321 3,708 3,277 2,602 2,039 2012 48,353 16,345 66,993 Gross Sales (1) Excise Taxes (2) Net Sales Cost of Goods Sold Gross Profit Operating Expenses (3) Depreciation (4) Interest Expense (5) Profit Before Taxes Income Taxes Net Profit Dividend 822 0 1,223 2,388 3,767 798 489 232 3,923 10,011 -90 -166 -231 -244 -122 1,530 323 1,223 6,067 13,656 13,967 13,790 13,638 13,108 13,393 15,497 14,113 14,861 19,176 27,048 4,772 17,579 150 22,501 14,027 36,528 4,426 23,860 0 28,286 14,389 42,674 2,327 21,446 303 24,076 15,096 39,172 Jan-13 Feb-13 3,401 3,616 -5% 34% 74% Inventory (14) 3,450 2,063 2,377 4,708 7,378 9,249 Notes: (1) Follows forecast in Exhibit 2 (2) Gross Sales * Exercise Tax Rate (3) Annual Operating Expenses / 12 (4) Gross PPE * Depreciation Rate / 12 (5) Notes Payable (t - 1) * Interest Rate / 12 (6) AR(t - 1) + GSales(t) - 40% * GSales(t - 2) - 60% x GSales(t - 2) (7) GPPE(t -1) + Capex(t) (8) 50% * Purchases(t) (9) Total Assets - AP - AccTax - ShrEquity (10) AccTax(t - 1) + IncTax(t) or 0 if positive balance and month of quarterly payment (11) ShrEquity(t - 1) + NetProfit(t) - Dividend(t) (12) 55% * GSales(t + 2) (13) 35% * Purchases(t-1) (14) Inventory(t - 1) + Purchases(t) + Direct Labour(t) - COGS(t) 8,384 4,023 2,052 1,730 1,227 806 1,155 45,153 -62% Exhibit 4 GUNA FIBRES, LTD. Guna Fibres Annual Income Statements (in thousands of Indian rupees) Gross Sales Excise Tax Net Sales Cost of Goods Gross Profits Operating Expenses Depreciation Interest Expense Profit Before Tax Income Tax Net Profit 2010 64,487 9,673 54,814 44,496 10,318 3,497 769 910 5,142 1,545 3,597 2011 75,867 11,380 64,487 53,866 10,621 4,829 909 1,240 3,644 1,093 2,551 Cash Accounts Receivable Inventory Total Current Assets Gross Plant, Property, and Equipment Accumulated Depreciation Net Plant, Property, and Equipment Total Assets 895 2,390 2,974 6,259 8,868 1,170 7,698 13,957 762 2,673 3,450 6,885 10,096 1,484 8,612 15,497 Accounts Payable Notes to Bank Accrued Taxes Total Current Liabilities Owners' Equity Total Liabilities and Equity 603 0 -62 541 13,416 13,957 822 798 -90 1,530 13,967 15,497 Exhibit 5 GUNA FIBRES, LTD. Guna Fibres Monthly Sales, 2011 Actual and 2012 Forecast (in thousands of rupees) January February March April May June July August September October November December Year 2011 2012 (Actual) (Forecast) 2,012 2,616 2,314 2,892 3,421 4,447 7,043 8,804 12,074 13,885 15,294 17,588 14,187 16,315 7,144 8,576 4,025 5,031 3,421 4,447 2,717 3,531 2,214 2,767 75,867 90,899 Too optimistic, about 20% sales growth Exhibit 6 GUNA FIBRES, LTD. Forecast of Accounts by Month 30 25 Millions of Rupees 20 15 10 5 0 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 -5 Net Sales Net Sales Accounts Receivable Inventory Accounts Payable Notes Payable Jan-12 2 3 2 0 0 Accounts Receivable Feb-12 Mar-12 2 4 3 5 2 5 1 2 0 4 Inventory Apr-12 May-12 7 12 10 18 7 9 4 5 10 18 Jun-12 15 25 8 4 24 Accounts Payable Jul-12 Aug-12 14 7 26 17 4 2 2 1 21 12 Sep-12 Oct-12 Accounts Payable Sep-12 4 9 2 1 5 Nov-12 Dec-12 Notes Payable Oct-12 Nov-12 Dec-12 4 3 2 6 5 4 1 1 1 1 1 1 2 0 0
Teletech Corp. Case FIN 450W January 31st, 2018 Recommendation Teletech should adopt the practice of using divisional hurdle rates for its two business lines. For Telecommunications Services, the hurdle rate (WACC) should be 8.53%. For Products and Services (P&S), the riskier segment, it should be 11.63%. This will allow each segment to more accurately identify positive net present value (NPV) activities. Although P&S was unprofitable in 2004, this division should not be sold because it creates opportunities for corporate growth and substantial future return. Problem Statement Teletech is under considerable scrutiny from both internal management and external analysts on how to optimize business performance. The issues Teletech faces are to ensure that the corporate hurdle rate has been correctly calculated; whether to use one corporate hurdle rate or adopt separate, risk-adjusted rates for each business segment; what the proper rates for Teletech’s two segments should be; whether or not to sell the P&S segment; and how to respond to the corporate raider. Analysis of Problem Corporate Hurdle Rate After careful analysis, the current corporate hurdle rate of 9.30% was determined to be an accurate representation of Teletech’s cost of capital. The rate’s inputs (i.e. costs of debt and equity) were calculated based on current market values and sound reasoning (Exhibit 1). Based on Teletech’s A-/BBB+ bond rating, a pretax cost of debt of 5.88% corresponds to industry averages. The risk-free rate of 4.62% is based on 30-year U.S. Treasury Securities, which is an appropriate measure. The weights used for debt and equity were based on market values. In addition, the hurdle rate is essentially equivalent to the weighted average of the divisional hurdle rates, which are discussed below. Calculation of Divisional Hurdle Rates Exhibit 1 summarizes the calculations of hurdle rates for Teletech’s two divisions. The pretax costs of debt for the divisions were obtained from current corporate bond yields in the industrials industry. To calculate the divisional equity betas, each division was first matched to companies with similar operations. These companies function exclusively in the same line of business as the divisions and have similar performance measures, such as revenue and bond ratings. Telecommunications Services was matched with Alltel Corp. and BellSouth Corp. due to their similarities in revenues, bond ratings, and capital structures. Products and Services was matched to Avaya Inc., Corning Inc., EMC Corp, Gateway Inc., and Seagate Technology for similar reasons. The betas for these companies were unlevered using their capital structures, relevered with the divisions’ respective capital structures, and then averaged. Telecommunications Services’ equity beta was determined to be 1.06 while P&S’s was 1.41. The yield on 30-year Treasury Securities was chosen as the risk-free rate, and the risk premium was assumed to be the same as Teletech’s corporate rate (5.50%). The cost of equity was calculated using the capital asset pricing model (CAPM). The capital structures for each division were assumed to be their respective industry’s debt-to-equity weights. Using these inputs, the hurdle rates for Telecommunications Services and P&S were estimated to be 8.53% and 11.63%, respectively. Advantages and Disadvantages of Divisional Hurdle Rates A primary center of debate is whether to maintain the use of one corporate-wide hurdle rate or to adopt individual rates for Teletech’s divisions. To generate maximum shareholder wealth, Teletech should implement the use of divisional hurdle rates. With a single corporate-wide rate, the Products and Services segment, which offers higher returns than Telecommunications Services, will be awarded ample capital due to its lofty returns. Conversely, Telecommunications Services will be starved for resources because its projects generally have a rate of return less than the corporate hurdle rate. What must be taken into consideration, however, is that P&S operations are far riskier than Telecommunications Services’. Projects that bear more risk must offer greater returns due to risk aversion. Lower risk projects should not be penalized for marginally lower returns. Risk-adjusted hurdle rates must be used to accurately judge the profitability of these segments. As shown in Exhibit 1, the risk-adjusted hurdle rates are 8.53% for the Telecommunications Services and 11.63% for P&S. Divisional projects should be judged on these rates. This would make it easier to identify sound investment decisions, and either accept or reject them accordingly. The largest disadvantage of using divisional hurdles rates is that they’re difficult to accurately calculate and require a sizable degree of qualitative judgement. In addition, risk-adjusted rates might cause the company to reject investments that offer long-term, strategic advantages, because they might cause losses in the short-term. Nevertheless, the benefits of using divisional rates far outweigh these costs. Products and Systems Segment and Response to the Corporate Raider A significant point of dispute is whether the Products and Systems segment is destroying value and should be divested. An analysis of economic profit using risk-adjusted hurdle rates is shown in Exhibit 2. In 2004, the P&S segment had an economic loss of almost $27.48 million, while Telecommunications Services had an economic profit of $73.31 million. Since P&S’s return of 11% did not surpass its hurdle rate of 11.64%, the division was operating at a negative net present value. As Exhibit 3 displays, P&S’s return is less than both its divisional WACC and the corporate rate of return line (CAPM line), while Telecommunications Services is above both its WACC and the corporate required rate of return. Although these findings present strong arguments for selling Products and Services, other factors must be considered. If this segment were sold, the company’s corporate hurdle rate would decline to that of Telecommunications Services, as this would be the sole business segment. Although corporate risk would decline, so would returns. Even though P&S has not been profitable in recent history, it has had tremendous revenue growth (40% the past year). The market that P&S operates in has grown enormously as well, while Telecommunications Services’ market has been fairly stagnant and is being invaded by new competitors. Hence, selling P&S would eliminate a highly valuable corporate growth opportunity. Due to this, Teletech should not sell this segment. Without accepting a degree of risk to gain strategic advantages, Teletech faces the threat of being surmounted by its competitors. In response to Victor Yossarian’s statements that Teletech is misusing its resources and Products and Systems should be sold, Teletech should emphasize the importance of continual expansion into computer/telecommunications technology. With the growing interdependence between computer systems and telecommunications services, this division will position Teletech for significant growth opportunities. Even though P&S suffered economic losses in the previous year, this division should offer premium returns in future business activities. With the implementation of divisional hurdle rates, decisions about which capital projects to pursue—those that generate acceptable return—will be simplified. Exhibit 1 TELETECH CORPORATION, 2005 Summary of WACC Calculation for Teletech Corporation and Segment Worksheet MV asset weights Bond rating Pretax cost of debt1 Tax rate After-tax cost of debt Corporate 100% A-/BBB+ Telecommunications Services 75% A 5.88% 40% 3.53% 5.74% 40% 3.44% Rf RM RM-Rf Cost of equity 1.15 4.62% 10.12% 5.50% 10.95% 1.06 4.62% 10.12% 5.50% 10.43% Weight of debt 22.2% 27.10% Weight of equity WACC 77.8% 9.30% 72.90% 8.53% Equity beta2 Products and Systems 25% BB 7.47% See note 1 40% 4.48% D 1.41 BL=BU(1+ /E) (see note 2) 4.62% 30-Year Treasury Yield 10.12% 5.50% 12.35% Ke=Rf+Beta(RM-RF) 9.19% See notes 3 and 4 90.81% we=1-wd 11.63% Notes: 1 Based on bond yields for corporate bonds in the Industrials market 2 Divisional betas were calculated by unlevering betas of companies that closely matched the division, relevering them the division's capital structure, and then averaging them. Telecomm. Services was matched with Attel Corp (beta of 1.00 and D/E of 30.1%) and BellSouth Corp. (beta of 1.00 and D/E of 29.7%). Products and Services was matched with Avaya Inc. (beta of 1.35 and D/E of 4.6%), Corning Inc. (beta of 1.45 and D/E of 13.4%), EMC Corp. (beta of 1.55 and D/E of 0.4%, Gateway Inc. (beta of 1.35 and D/E of 13.4%), and Seagate Technology (beta of 1.20 and D/E of 11.1%). 3 Telecommunications Services' capital structure is assumed to be the industry average for telecommunication services (27.1% debt to total capital). 4 Assumptions Products and Systems' capital structure is assumed to be the average of the telecommunications equipment (13.1% debt to total capital) and computer and network equipment industries (5.3% debt to total capital). Exhibit 2 Teletech Corp. Economic Profit for 2004 Telecommunications Services Corporate Products and Systems $1,660 $1,180 $480 9.58% 9.10% 11.00% 9.30% 8.53% 11.63% NOPAT (millions) Return on Capital (ROC) Hurdle Rate 1 Capital Employed Economic Profit (millions) 2 $17,328 $12,967 $4,364 $48.52 $73.31 -$27.48 Notes: NOPAT /Return on Capital 1 Capital = 2 Economic Profit = (ROC - Hurdle rate) * Capital Exhibit 3 Assessment of Constant vs. Risk-Adjusted Hurdle Rates 18.00% 16.00% 14.00% WACC and Return % P & S WACC 12.00% P & S Return 10.00% Rate of Return (CAPM) 8.00% Teletech Corp. WACC 6.00% 4.00% Telecomm. Services Return 2.00% Telecomm. Services WACC 0.00% 0 0.5 1 Risk (Beta) 1.5 2 Products & Systems WACC Products & Systems Return Telecomm. Services WACC Telecomm. Services Return

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