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Teletech Corporation, 2005. Advanced Managerial Finance UTPA Spring 2013. Objectives. Extend risk-return (i.e. mean-variance) analysis to corporate finance Survey arguments for and against the use or risk-adjusted hurdle-rate systems
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Teletech Corporation, 2005 Advanced Managerial Finance UTPA Spring 2013
Objectives • Extend risk-return (i.e. mean-variance) analysis to corporate finance • Survey arguments for and against the use or risk-adjusted hurdle-rate systems • Assess the assumptions and limitations of risk-adjusted hurdle rates • Exercise the estimation of segment WACCs • Consider organizational barriers to the implementation of risk-adjusted hurdle rates
Constant- vs. Risk-adjusted WACC • The constant WACC system currently in use feeds the P+S segment and starves the Telecommunications Services segment. • A risk-adjusted system would do the reverse. • What are the financial results under the constant WACC system? Low P/E multiple, a threatened attack by a corporate rider.
Constant- vs. Risk-adjusted WACC • A constant hurdle-rate can result in the acceptance of bad investments • A constant hurdle-rate can result in the rejection of good investments • If investment opportunities form an upward-sloping cloud in risk-return space, constant hurdle-rates can result in naïve risk shifting in the pursuit of higher-return investments
