Corporate Finance 1. Do you agree with the logic of multiple hurdle rates? I agree with the logic of multiple hurdle rates for the companybecause they constitute a part of good decision making rule. Teletech should adhere to the following decision making rule to assure long term profitability and survival. Criteria for a Good Decision Rule 1. Flexibility Allows subjective assessment Judges different project consistently 2. Maximizes value Cant have an investment choice that does not maximize our stated objective 3. Different types of Investments A firm may participate in different industries (e.g., computers, telephones, software, etc.) Speaking about financial calculations I should note that the company must strive to maximize its shareholder value.
Here I would like to note the Accounting Income-Based Rulesexplanation of which is see I the addendum section of the essay. One has to remember that different accounting standards affect cash flows poor performance. This method indeed ignores discounting ignores procedure of cash flow/firm maximization. And this method works better for projects that have large up-front investment. Therefore, the corporate management must consider Cash Flow Based Decision Rules the theoretic formulas are shown in the addendum section of the essay. Judgement: Some non-cash items such as inventory, capital maintenance and working capital are not considered by the project evaluation approaches used at Teletech company.
Therefore the company should rather adhere not only the dry and cut figures derived from the calculations, but rather should also undertake projects that would suffice the public opinion of the area Teletech operates in. Therefore, the company should work better with projects with up-front costs because the present value calculations are not precisely considered in calculations that utilize multiple hurdle rates. More on NPV and IRR Multiple IRRs Sometimes the IRRs are so large/small that there is no real problem If there are several viable choices, use in combination of other rules Projects of different scales Consider two choices with identical hurdle rates but different scales NPV biased towards larger project, IRR towards smaller project Choose larger project if (1) firm has no trouble raising capital (2) it does not rule out other smaller projects Different Reinvestment Rates NPV reinvestment at hurdle rate; IRR reinvestment at IRR (IRR > Hurdle) Cash flows early on reinvest at (lower/hurdle) higher/IRR project looks relatively (less) more attractive MIRR: reinvest cash flows at hurdle rate; practically speaking, this is a weigthed average of NPV and IRR; weights depend on timing of cash flows (early cash flows more weight to hurdle rate/NPV) 2.
The Dissertation on Related Literature to the Cash Flow Management
The role of cash flow information in discriminating between bankrupt and non-bankrupt companies remains a contentious issue. In a number of literature reviews on bankruptcy prediction (e. g. Zavgren, 1983; Jones, 1987; Neill et al. 1991; Watson, 1996) the common view is that cash flow information does not contain significant incremental information content over accrual information in ...
Do you agree that all money is green? What are the implications of this view? What are the arguments in favor? Opposed? This question can be answered as yes with minor reservations. It is the firms duty to maximize its shareholders value and the only way to do so is by undertaking profitable projects regardless of the personal opinions. The all money is green is the concept similar to money has no odor first put forth my Emperor Maximilian of Rome who would impose taxes on toilets. After his son asked the dad of how he could do such disgusting thing, the father took a silver coin and showed it to his son saying this coin does not smell, unlike the toilets I tax. I can say that the firm must keep the all money is green argument as its priority and make as much money as possible.
Still here one has to consider the ethical side of the decision making regarding the projects and all money is green argument. It is a well known fact that various illegal industries like drug, women/children trafficking, weapons sales are extremely profitable from the point of view of economics with most of them yielding a present value of 7 or even 10 which is much higher than humble 1.2 Teletech Corporation expects from its projects. No one is going to get involved in the following industries because of the unethical nature despite the fact that the projects are profitable. One has to have projects that are both legal and ethical to qualify to be applied the all money is green argument to. Nuclear power plants present another profitable project, yet just like the illegal industries expressed above, it also damages the health of people and the environment. It is for this reason the USA does not see nuclear power plants grow fast but rather sees them controlled by the government. Thus I would like to say that after the decisions are considered ethical and legal the firm must apply all money are green to all its divisions.
The Business plan on Time Value Of Money Problem Assignment
Prepare solutions to the following problems and submit them as instructed by your section instructor. Show all calculations, or identify the sequence of steps and buttons to your financial calculator, to support the solutions you submit. John is purchasing a house for $500,000. He plans to make a down payment of $100,000 and take out a 30-year mortgage for $400,000. If the interest rate on the ...
As the case says the money should be put to the projects that yield maximum returns. 3. What changes would you recommend in Teletechs resource allocation process? Support your answer quantitatively. Personally I find the current capital structure at Teletech rather optimal for the fact that the although equity is more desirable the debt provides a much cheaper source of funding for the whole corporation. Still I have some considerations regarding the change in the corporate structure. First of all, high debt certainly leverages the firm making it susceptible to more risks that might arise in carrying out business operations. Secondly, as the case noted some of the divisions (computer) were unable to find cheap sources of funding (debt) and had to reserve to equity or to debt generated and secured by the parent company (Teletech).
This certainly means that the divisions are given the greenhouse treatment and are not fully experiencing the competitive market environment as the proponents of the effective market hypothesis would recommend. As one could see the riskier divisions were primarily financed with equity, which is seen by the low debt/total capital ratio as compared to other industries. Thirdly I would like to note on the ratio correlations that negatively influence the Teletechs development. For instance teletech is the only company that finances by over 44% of the total software development with debt and consequently has the the lowest Return on Investment in the group. Because of the small amount of equity allocated to the computer software industry the payout ration appears to be the highest while the P/E is the lowest. One would not be surprised by such figures because the high debt in the corporate structure makes the software division risky.
The Essay on Capital cost
Q1. Bob Richards, the production manager of Zychol Chemicals, in Houston, Texas, is preparing his quarterly report, which is to include a productivity analysis for his department. One of the inputs is production data prepared by Sharon Walford, his operations analyst. The report, which she gave him this morning, showed the following: 2008 2009 Production (units) 4,500 6,000 Raw material used ( ...
I personally was surprised to see Teletech beta being the lowest and only equaling 1.00. Recommendations: Each Teletech division should try to match the industry average for debt/equity composition of capital structure. The company appears very suspicious and risky if it has 3 times as much debt and twice as much equity as any other company in the industry. Each Teletech division should try to generate the funding on its own or at least be given impartial treatment following all money is green argument. Of course a company wants to see all its divisions grow, yet it must admit that in some areas the expertise is inadequate and thus that division should be left alone for survival or be abandoned altogether. The Teletech company should not take as much debt (75% of total capital) as proposed by the management. The debt is good to some point, yet if more debt is taken than expected by the market, Teletech will be negatively affected by such capital structure.
The credit agencies would downgrade Teletech bonds and equity thus immediately pulling the borrowing costs for Teletech up. The only way Teletech can try to minimize its borrowing costs is by growing in size. Excessive equity will only depress the stock value, excessive debt will increase the borrowing costs for Teletech and also depress the stock value. The company should organically grow and develop its reputation and financial security and not try to use any gimmicks to reduce the borrowing costs.
Bibliography:
Case study of Teletech company Thompson, Peter, Corporate finance, McGraw Hill, 2002. Addendum: Accounting based rules: Return on Capital > Cost of Capital accept project i.
The Research paper on Marriott Corporation: the Cost of Capital
Dan Cohrs of Marriott Corporation has the important task of determining correct hurdle rates for the entire corporation as well as each individual business segment. These rates are instrumental in determining which future projects to pursue and thus fundamentally important for Marriott’s growth trajectory. This case analysis seeks to examine Marriott’s financial strategy in comparison with its ...
ROC (pre-tax) = EBIT/Ave. Book Value of Total Investment in Project ii. ROC (after-tax) = EBIT*(1 t)/ Ave. Book Val. Of Total. Inv in Project Multi-year project: take ave. of (i) annual RoC or (ii) EBIT and Investment Return on Equity > Cost of Equity accept project ROE = Net Income/Ave.
Book Value of Total Investment in Project Cash Flow Based Decision Rules Cash ROC > Cost of Capital accept project Cash ROC = Cash Operating Income/Ave. Book Value of Capital where Cash Op. Inc. = EBIT(1 t) + Dep. and other noncash charges Cash ROE > Cost of Equity accept project Cash ROE = Cash Equity Income/Ave. Book Value of Equity where Cash Eq.
Inc. = Net Inc. + Dep. and other noncash charges Cost of Capital. What impacts the cost of capital?.
