Communication Satellite Corporation Essay

The following judgment on the appropriate economic regulations of the Communications Satellite Corporation (Comsat) has been arrived at after considering the due deliberations bring ined onwards the Commissioners by the two parties namely Comsat and FCC.Central to this judgment is the premise that the military issue to the equity owner should be commensurate with returns on investments in other(a) enterprises having corresponding pretends. Also, the neat rate of return should be actually that necessitate (or expected) by a firms investors. The Commissioners are also of the discover that the interests of the ratepayers should be safeguarded. The ratepayers should not be penalized for any change in part (e.g. excess liquid cash due to change of technological needs) resulting in inefficiency at Comsat. Such tryiness should be borne by the Shareholders alone. The judgment covers the fair rate of return awarded to Comsat (commensurate to its fortunes), the rate base and the m onetary value structure to be followed by Comsat.At the onset, we concur with Comsats argument that their risk write cannot be compared to that of AT&T due to the following1. Even though AT&T is in the same business of providing communication channels, even so the equipment used is vastly divergent i.e. satellites versus data 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 found for AT&T and Comsat are different thus implying that the investors view the inherent risk of the companies differently.Next, we look into the various risk incidentors discussed before us in order to reasonably estimate the risk inherent in Comsat.Operating put on the lines1. Technological Risk The trial ply established low technological risk by considering in hindsight the fact that Comsats evolution was relatively trouble-free. In our opinion, this is unjustifiable as when the associat ion was started there was no way of k straighting this and the technological risks were immense.2. Business Risk There 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. indigence Risk The arguments put forward by the trial stave in this case are sound but do not present a case for comparison with AT&T.4. Competitive Risk We ideate 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 justify to some extent by FCCs tolerate.5. Regulatory Uncertainty once more 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 organi zations in operation(p)(a) 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 ascribe the implications of a 45% debt structure to calculate the salute 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 piazza 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 Carleton and their thought of Comsats equal of capital. Dr Brighams method takes into study 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 iv 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 methodological analysis followed for astute this. Also, we suck in no indication whatsoever about the personality of this premium, whether it is the risk premium for Comsat or the utilities sector or the commercialise 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 an d 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 efficientimplies that the appropriate risks have been implicitly factored into the prices and the beta. base upon these estimates we will state the cost of capital to be 14%, which is the mid(prenominal) 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 bodily structureThe 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 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 coin 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.