Teletech Analysis

Problem: 7

1. Rick Phillips’s arguments:

• Different phases of business are facing different risks. High risk concern like Teletech has inferior access to cheaper finance, resulting high cost of debt.
• Hurdle rate should be adjusted with the higher cost of funds.
• Help steer capital towards more profitable enterprises, which has steady growth.
• Stockholders are concerned about risk and are not willing to invest in risky companies.

1. Rick Phillips’s arguments:

Teletech should say to Rick : He understand exactly the hole point and Teletech should consider the risk rate for both segments and apply different hurdle rates to value the investments each business unit is going to take. Even thouh it might cause the calcualtion of NPV to be inconsistent and harder to understand for the stakeholders but if explained carefully it would resolve the problem. Helen Buono: she is wrong with her theory that if Teletech invests only on Telecommunication, the value will be go down the WACC of the segment. If there is no progress after some time, Teletech corporation might have to sell that division in order to maximize value for the shareholders. In response to Victor Yossarian, Teletech should say that if the hurdle rate of 9.30% to all capital project are based on to evaluate the business performance regardless of the risk, which also mean Teletech is undervaluaing Telecommunication services and overvaluaing product and services. Therefore, to create value for shareholders, NPV of each division is needed measuring with different hurdle rates considered by the risk for each business unit. Then  the division which has negative NPV will be eliminated.

Starve hunch

As a multiple line business company, I have choosen Jhonson and Johson, engaging in three segments: Consumer, Pharmaceutical and Medical Devices. From the Eikon, we can see that the highest portion of its income 47% is coming from the Pharmaceticuels while other two Consumer and Medical Devices & Digonostic are generating income 18% and 35% respectively.

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Over the five years its price has been increased from 6.675% in July,13 to 175.266% in April,18 with 5Y Monthly Beta 0.73. At Dec-17 ROE and Debt/Equity are 4.30% and 57.48% separately.

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Problem 1:

We know that Cash flow from Asset (CFA)= Operating Cash flow (OCF)-  Net capital spending – Change in NWC-----(1)

So, to find the changes in NWC, we have to calculate CFA (step 1), OCF (step 2) and net capital spending (step 3)

Step 1: To find the OCF, we first calculate net income.

Income Statement