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Communication Satellite Corporation

Paper type: Essay
Pages: 5 (1007 words)
Categories: Communication, Corporation, Sat, Satellite
Downloads: 36
Views: 170

The following judgment on the suitable financial guidelines of the Communications Satellite Corporation (Comsat) has been shown up at after considering the due considerations provided prior to the Commissioners by the 2 parties; particularly Comsat and FCC.

Central to this judgment is the property that “the go back to the equity owner must be commensurate with returns on financial investments in other enterprises having corresponding dangers.” Also, the fair rate of return must be really that required (or expected) by a firm’s financiers.

The Commissioners are also of the view that the interests of the ratepayers must be safeguarded. The ratepayers must not be punished for any change in circumstances (e.g. excess liquid money due to alter of technological requirements) leading to ineffectiveness at Comsat. Such danger needs to be borne by the Shareholders alone. The judgment covers the fair rate of return granted to Comsat (commensurate to its risks), the rate base and the price structure to be followed by Comsat.

At the start, we accept Comsat’s argument that their danger profile can not be compared to that of AT&T due to the following:

1. Although AT&T remains in the exact same business of providing interaction channels, yet the equipment used is vastly different i.e. satellites versus data cables.

2. AT&T is a well-established energy while Comsat is a brand-new venture. Their danger profiles are not similar.

3. Considering the testimony of Dr. Myers, the beta discovered for AT&T and Comsat are various thus implying that the investors see the fundamental danger of the business in a different way.

Next, we check out the various threat factors talked about before us in order to fairly approximate the danger inherent in Comsat.

Operating Dangers

1. Technological Danger: The trial staff established low technological threat by thinking about in hindsight the reality that Comsat’s evolution was relatively trouble-free. In our opinion, this is unjustifiable as when the business was started there was no way of knowing this and the technological dangers were enormous.

2. Organisation Danger: There was no government guarantee for Comsat. Also, thinking about the truth that revealing info in a prospectus in no other way alters the danger connected with the business.

3. Demand Risk: The arguments put forward by the trial staff in this case are sound but do not present a case for comparison with AT&T.

4. Competitive Risk: We think that competitive risk is medium, thus deviating from both the trial staff and Comsat’s stand. This is because although high risk was created due to Comsat’s competitors being its customers, it was also mitigated to some extent by FCC’s support.

5. Regulatory Uncertainty: Again this uncertainty of prospective regulation is reduced by expected support from FCC.

6. Political/International Risk: We agree here with the trial staff’s response. The risk faced by Comsat is probably just a little greater than that faced by other international organizations operating in those countries during that time.

From the above discussion, we conclude that the company faces more operational risk than that touted by the trial staff albeit it is not as high as Comsat claims.

Financial Risk

The trial staff wants to impute the implications of a 45% debt structure to calculate the cost of capital. This is incorrect since firstly, there were no assets that could be used as security till 1972 and secondly, this is a hypothetical situation of which there can be many. However, we are of the opinion that the debt should be imputed at a rate of 45% post-1972 as a miscalculation on part of the management should not result in unjustified price structure for the ratepayers.

Rate Base

The appropriate rate base should now be calculated based on the above decision to impute debt post-1972. Pre-1972, the rate base will be the entire capital of the company.

Evaluation of Cost of Capital

We disagree with the first two witnesses, namely Dr Brigham and Dr Carleton and their estimation of Comsat’s cost of capital. Dr Brigham’s method takes into account 602 industrial firms and 56 utilities. These two categories of companies are not comparable for the purposes of this analysis. Also, the Andersen study using four utilities and its results is not worth considering since these utilities had a different capital structure and consequently, a completely different risk profile from that of Comsat.

Dr Carleton has arrived at a risk premium of 2-4% but has provided no reasonable justification or methodology followed for calculating this. Also, we have no indication whatsoever about the nature of this premium, whether it is the risk premium for Comsat or the utilities sector or the market or the country as a whole.

We concur with Dr Myers’ methodology of using the CAPM for calculating the risk premium. This study further simplifies matters as the cost of equity and the cost of capital is the same for this firm pre-1972 and incorporate the cost of debt post-1972. Also that the beta in this case would be calculated on the basis of market data. Assuming the markets to be efficient implies that the appropriate risks have been implicitly factored into the prices and the beta.

Based upon these estimates we will state the cost of capital to be 14%, which is the mid point found for the various risk estimates over time, taking into account a beta range from 1.4 – 1.7 as recommended by Dr. Myers.

Pricing Structure

The commissioners are of the view that Comsat was injudicious in charging the maximum rates the markets could bear. Instead, Comsat should have charged rate of return that is sufficient for it to maintain:

a) to cover cost of capital already committed to the enterprise over and above the operating expenses incurred; and

b) to attract additional capital as needed in competitive money markets at reasonable costs.

We instruct FCC and Comsat to calculate the appropriate revenues for Comsat in line with the preceding judgment. Comsat should be penalized 50% of the excess revenue, if any, and FCC should use this money to further infrastructure development in Communication systems.

Cite this essay

Communication Satellite Corporation. (2016, Jul 21). Retrieved from https://studymoose.com/communication-satellite-corporation-essay

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