Communications Satellite Corp. Case

Communications Satellite Corp. Case

Your paper should investigate the determinants of the "cost of capital" for Comsat. You should include in your writeup a conclusion about what the "fair rate of return" on Comsat is for 1975 and the future. You should assume that the appropriate "fair rate of return" is the rate of return on assets expected by capital market investors. In your investigation, you may want to address some of the following issues:

1. The difference between systematic and nonsystematic risk,

2. The relationship of both systematic and unsystematic risk to the rate of return on assets expected by investors,

3. What particular risk considerations mentioned in the case cause the rate of return expected by investors to increase (or decrease),

4. The effect on Comsat's riskiness of its receiving "a large portion of its business ... during cable outages and periods of excessive demand,"

5. The change in the proportion of real investments undertaken by Comsat and marketable securities (liquid assets) held by the firm over time,

6. The types of marketable securities Comsat held and the riskiness of these securities,

7. The relative merits of the Brigham, Carleton, and Myers methods of cost of capital determination,

8. The paradox that Comsat's beta, as measured by Myers, seemed to be rising over time as its technology was getting less and less risky.

and 9. Any connections between 1 through 8 above.

Again, your written input should be brief (2 pages or less), but the analysis you do in your groups to arrive at your recommendation should be thorough and thoughtful. Your paper should be convincing to a financial professional on the FCC Board. If you find the case writeup lacking in some important information, you should make reasonable assumptions about how this information is likely to look. If expertise in areas other than finance is useful, be sure to use such expertise.

Do not spend time on issues tangential to the risk ones delineated here. Many issues, such as whether after-the-fact return regulation makes sense, will not be relevant for this assignment.

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