A Report On The Teletech Corporation

Futronics Inc. is a $2 billion firm that sells communications services. Founded in 1937, Futronics Inc. has provided consumer products, as well as government systems and services, for well over half a century. Due to a sharp increase in competition, flattened sales, and external economic conditions, Futronics Inc. is implementing a corporate overhead reduction program. The proposal is to replace the company’s central office stores with outside vendors. The investment will cost $1,000,000 and yield incremental cash flows of $450,000 in year one (1), $350,000 in year two (2), $300,000 in year three (3), and $250,000 in year four (4). There is no salvage value of the asset, and the firm has a cost of capital of 8%. Using capital budget methods, Net Profit Value, Internal Rate of Return and Payback method, the capital investment can be appraised. Futronics Inc.

P = F(1 + i)-N where i is 15% as mentioned in the case suggestions and N is 8 as we found above, and F is $1.2375B

Based on the suggestion that the focus should be on market values, compute the weights of debt, preferred stock, and common stock.

The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).

Since this project is a going concern, the levered terminal and present values are calculated using the weight average cost of capital (WACC) as the discount rate, which we calculate to be 16.17%.

The Conch Republic is an organization which produces reputable electronics is seeking to advance one of their current production lines to stay abreast to changing technology. The company is seeking to introduce a new smart phone with the hopes of boosting the company’s revenue and reputation as a smart phone producer. As a person hired to assess the financial undertaking of Conch Republic an overview of the projects planned expense must be generated. However, in order to accomplish this task a capital investment analysis must be conducted in order to determine the projects viability. This will be done by analyzing several things. Those things that must be understood are the projects payback period, the net present value (NPV), internal

Based upon the firm’s low target leverage of 5%, low degree of operating leverage, and favorable credit history and financial outlook, the model assumes a cost of debt in line with AAA corporate debt at 7.02%. This estimate seems reasonable and sensitivity analysis shows a 1% decrease in the forecasted share price requires at least a 2.4% increase in the cost of debt.

We calculated the proportions of debt and equity for the project based on the market value of the debt and equity held by Southwest Airlines in spring 2002. Total

Weights of Debt and equity are 8.3 and 91.7%. Now, plugging all the values in, we can derive company’s Weighted Average Cost of Capital.

3. Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why of why not?

In order to evaluate the NPV of the first-generation phone (project) ignoring the possibility of investing in the second-generation phone (project), we projected the free cash flows (FCF) of the first-generation phone through 2001 to 2006. The total FCF was calculated as EBIT plus deprecation and subtract any capital expenditures along with change in net working capital. With risk-free rate of 10%, comparable firms’ beta of 1.2, and market premium of 4%, the appropriate discount rate for the project was 14.8% using CAPM. Sum

The weights of debt and equity are calculated using the market values of debt and equity as follows:

Using the same market risk premium and risk free rate (5.5% & 4.62% respectively) given in the case, the averaged beta of 1.40, the pretax cost of debt of 7.65%, and the weighted average of debt & equity, the products & systems

Weight of Equity = 71%; Equity Cost of Capital = 12%; Weight of Debt = 29%; Debt Cost of Capital = 4.55%

* Following our discussion in class, use the market values of equity and book values of debt when calculating debt and equity weights.