A Brief for a financial case - Essay Example

A Brief for a Financial Case Analysis of Teletech Corporation Teletech Corporation is telecommunication service provider which offers long distance, local and mobile network services to commercial and domestic customers. Unfortunately, the return of Teletech Corporation has become a matter of argument among the senior executives and a number of questions have been raised about using hurdle rates in order to assess the financial performance of the company and develop the yearly budget. In the year 2004, one division of Teletech Corporation i.e. telecommunication services had generated return on capital of almost 9.1%. However, in the past few months, the market share of Teletech Corporation failed to maintain pace with general stock market and with the telecommunication business index.

Security forecasters had commented on the company’s uninspiring rates of return, particularly in comparison with the strong competition in telecommunication industry as well as unsatisfactory financial performance in the product and system division (Bruner, R. F., “Case Studies in Finance: Managing for Corporate Value Creation”).The product and system division was recognized as industrial leader in the telecommunication business and maintenance of this leadership status necessitates substantial outlay in research and development.

As the entry of numerous companies in the telecommunication sector improved, the technological transformation and competition had also raised considerably. Converting the mission statement of Teletech Corporation into real world performance had become a difficult task for Margaret Wetson, the Chief Financial Officer (CFO) of Teletech Corporation in order to maintain its position in the market. Therefore, first significant requirement was to create a value of the company. In order to create value, Teletech had implemented economic profit as a measure of developing strategic decision regarding capital distribution, promotion, and incentive recompense (Bruner, R. F., “Case Studies in Finance: Managing for Corporate Value Creation”).

The other method for value creation was evaluation of capital investment offers by using the hurdle rate. Hurdle rate is helpful for providing an amount of net present value (NPV) of each offer. The implementation of hurdle rate has become an issue of conflict within the senior managers of Teletech Corporation. The Vice President of telecommunication service division, Rick Phillips had depicted that without hurdle rate the threat of investment cannot be managed and telecommunication service segment will face lack of capital.

He has also depicted that with hurdle rate, the telecommunication service segment can earn 9.1% return on capital (Bruner, R. F., “Case Studies in Finance: Managing for Corporate Value Creation”). Though many have supported the view of Rick Phillips, the Vice President of Product and System Division contrasted his opinion. She had depicted hurdle rate as illogical because it can destroy the value of shareholder in case the company fails to satisfy the corporate hurdle rate. According to her opinion, the divergence of company helps to make the capital expenses low and it allows using more money compared to the ability of a single division, which makes the separate hurdle rate impractical and deceptive (Bruner, R. F., “Case Studies in Finance: Managing for Corporate Value Creation”).

RecommendationIt is recommended that Teletech Corporation should use hurdle rate in order to make decisions on investment. The reason is that hurdle rate concentrates on the financial characteristics of any investment proposal. Each segment of Teletech Corporation comprises some sort of risk or poor return which can be affixed though hurdle rate if assessment of the investment displays that particular prospects essentially comprise higher degree of risk. Hurdle rate is a basic method to achieve good premium on investment and can help to make Teletech Corporation to recognize if investment in any project is profitable or not.

Work CitedBruner, Robert F. Case Studies in Finance: Managing for Corporate Value Creation Tata McGraw-Hill Education, 1993.