Communication Satellite Corporation Essay

The fol embarrasseding judgment on the appropriate economic regulations of the Communications Satellite Corporation (Comsat) has been arrived at after considering the due deliberations presented before the Commissioners by the two parties namely Comsat and FCC.Central to this judgment is the premise that the invert to the equity owner should be able with returns on investments in other endeavors having corresponding put on the line of exposures. Also, the fair rate of return should be actually that needful (or expected) by a firms investors. The Commissioners are also of the view that the interests of the ratepayers should be safeguarded. The ratepayers should not be penalized for any change in circumstances (e.g. excess liquid cash due to change of proficient needs) resulting in inefficiency at Comsat. Such risk should be borne by the Shareholders alone. The judgment covers the fair rate of return awarded to Comsat (commensurate to its risks), the rate base and the price gra mmatical construction to be followed by Comsat.At the onset, we hold in with Comsats debate that their risk profile so-and-sonot be compared to that of AT&T due to the following1. Even though AT&T is in the same business of providing communication channels, yet the equipment used is vastly varied i.e. satellites versus information cables.2. AT&T is a well-established utility while Comsat is a new venture. Their risk profiles are not similar.3. Considering the testimony of Dr. Myers, the beta undercoat for AT&T and Comsat are different thus implying that the investors view the indispensable risk of the companies differently.Next, we look into the various risk factors discussed before us in order to reasonably augur the risk inherent in Comsat.Operating Risks1. Technological Risk The footrace provide established low technological risk by considering in hindsight the fact that Comsats evolution was relatively trouble-free. In our opinion, this is untenable as when the company was started there was no way of knowing this and the technological risks were immense.2. Business Risk at that place was no government guarantee for Comsat. Also, considering the fact that disclosing information in a prospectus in no way changes the risk associated 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 coincidence with AT&T.4. Competitive Risk We think that rivalrous risk is medium, thus deviating from both the trial staff and Comsats stand. This is because although high risk was created due to Comsats competitors being its customers, it was also mitigated to some outcome by FCCs 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 staffs 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 RiskThe trial staff wants to impute the implications of a 45% debt structure to calculate the apostrophize 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 BaseThe 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 CapitalWe disagree with the first two witnesses, namely Dr Brigham and Dr Carleto n and their estimation of Comsats cost of capital. Dr Brighams 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 victimisation 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 vindication 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 d ebt post-1972. Also that the beta in this case would be calculated on the basis of market data. Assuming the markets to be efficientimplies 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 StructureThe commissioners are of the view that Comsat was injudicious in charging the maximum rates the markets could bear. Instead, Comsat should have supercharged rate of return that is sufficient for it to maintaina) to cover cost of capital already committed to the enterprise over and above the operating expenses incurred andb) 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.