This is an idea for Jasons part. The allocation of resources implied by the two systems would be diametrically opposed.

The constant WACC system currently in use would feed the P+S segment and starve Telecommunications Services; a risk-adjusted system would do the reverse because Teletechs financial results under the constant WACC system are already known. This part is mine. The calculation Since the two divisions vary in terms of riskiness, we determine the individual equity beta by calculating the weighted average beta of the competitors based on the revenue of 2004, Exhibit 2 in the case. The weighted average of Telecommunications equipment and computer and network equipment industry makes a good proxy for Teletechs Products and Systems division. The actual calculation is shown in Appendix 1. ( )

According to the Capital Asset Pricing Model above, the change in equity beta of each division affects the cost of equity. The market return ( ) and risk free rate ( ) were given and there is no reason to change it. As a result, the cost of equity ( ) for telecommunications services is 10.36% while the Products and Systems ( ) is 12.10%, Appendix B. The next adjustment is for the cost of debt ( ). Since each division has different bond rating, it is appropriate to adjust the cost of debt to reflect the difference. According to Exhibit 4 in the case, the pre-tax cost of debt for Telecommunications services is 5.74% because of an A rating. On the other hand, Products and systems, with bond rating of BB, have the pre-tax cost of debt of 7.47%. Finally, we need to calculate the weight of debt ( and weight of equity ( ) for each division. We differentiate the debt mix between the two divisions to reflect the business nature of each division. The telecommunications services are a very low risk industry so it can afford to sustain the higher leverage, 27.1% debt and 72.9% equity. On the other hand, Products and Systems are a highly volatile industry due to high capital investment in research and development and fixed asset. As a result, Products and Systems division is heavily financed by equity, 7.5% debt and 92.5% equity. These debt levels are weighted by the market value of each division. If we were to combine them, the resultant leverage would be the same as what was given in the case, 22.2% debt and 77.8% equity. ( ( ( Using the equation above, we can determine the weighted average cost of capital for each division. Appendix 2 reveals that the cost of capital for Products & Systems is 11.53% while the WACC for Telecommunications services is 8.49%. In comparison to prospective returns of 11%, this indicates that the Products & Systems division is not earning an adequate return for the investors as Yossarian suggests. On the other hand, Telecommunications services returns of 9.1% have been profitable.

Based on our analysis, we recommend that Teletech Corporation apply appropriate hurdle rate for different divisions. This will help prevent unnecessary capital allocation, improve the companys efficiency when evaluating future projects, and maximize the profitability for shareholders.