NAME Charles Daugharthy
DATE March 16, 2016
CASE TITLE Communication Satellite Corporation (CSC)
The Communication Satellite Act was created in 1962 to mandate a national policy of a worldwide communications satellite system that cooperated with other countries. Under this act, CSC, a privately held company would represent the United States. The FCC was able to regulate CSC and this was allowed due to the recently passed Communication Satellite Act. As this industry started to grow CSC requested their first rate increase which led to a FCC proceeding. First, the FCC needed to determine CSC’s required rate of return. During the proceeding, three testimonies were given, one by Dr. Brigham, Dr. Carleton, and Dr. Myers. Brigham argued for a 12% rate of return for CSC for 1964 to September 1974 and then a 15% ...view middle of the document...
(2) MAJOR PROBLEM(S):
FCC and CSC are puzzled on how to determine and accurate rate of return for a company that is the first of its kind. Also, there is no other real competition to compare it to.
(3) ALTERNATIVE COURSES OF ACTION:
One option is for the FCC to just pick one of the three testimonies to determine the correct rate of return. Another would be for the FCC to pick another way to calculate the rate of return.
(4) BRIEF ANALYSIS OF ALTERNATIVES:
The first suggestion is to pick from Brigham, Carleton, and Myer’s methods on calculating the required rate of return. Brigham used the discounted cash flow method. Under this method, the rate was wrong because of CSC is a new firm in a new industry. CSC is so new, that is doesn’t have any sort of past cash flows or industry cash flows so that they can predict future cash flows for this method. He also compared CSC to low risk firms, but the firms beta was 1.69, the firm had very high risk. Carleton’s model is also troublesome because he uses AT&T as a benchmark for the forecast of CSC. AT&T isn’t a good benchmark because they have a much lower beta of .62 and they have a debt ratio of 50% where CSC has a debt ratio of 0%. Myers states that CSC beta is much closer to the beta of industrial firms and not AT&T. He also used the CAPM model, which is much more accurate and takes into account the beta of the firm. Which is a much better way of analyzing risk. The final alternative is to change the method of calculating the required rate of return. A model that is similar to Brigham’s could be effective if the betas were closer to CSC. Carleton’s model would be more effective if he used firms that were more closely related to CSC instead of AT&T.
(5) SUGGESTED COURSE OF ACTION:
The FCC should adjust Brigham and Carleton’s model and then look at the new numbers to Myer’s CAPM model to determine the actual required rate of return.