CASE SUMMARY NAME: Daniel Hughes DATE: 3-15-13 CASE TITLE: Communications Satellite Corporation (1) BACKGROUND: In January of 1975 the Federal Communications Commission concluded an 11-year investigation of the appropriate economic regulation of the Communications Satellite Corporation (Comsat). The FCC is looking to decide on many issues, including the determination of a fair rate of return on Comsat’s cost of capital. Comsat had suggested a 12% rate of return for the period of 1964 to 1974 and 15% thereafter. However, the FCC’s staff has presented evidence to contradict that of Comsat. (2) MAJOR PROBLEM(S): The major issue is calculating how the FCC can determine Comsat’s fair rate of return and cost of capital and what fair rate of return is appropriate for Comsat’s particular level of risk? (3) ALTERNATIVE COURSES OF ACTION: The FCC could determine Comsat’s fair rate of return using one of the three following methods: 1. The indirect approach of discount cash flow (DCF) approach, incorporating a dividend growth model suggested by Dr. Eugene Brigham, a Comsat witness 2. The approach of Dr. Willard Carleton, the trial staff’s witness – a methodology as presented as ke = Rf + risk premium 3. The capital asset pricing model (CAPM) suggested by Dr. Stewart Myers, a rebuttal witness for Comsat (4) BRIEF ANALYSIS OF ALTERNATIVES: 1. Dr. Brigham’s study estimated Comsat’s cost of equity in 1964 between 12% and 14% and in 1971 between 11% and 13%. This study included mostly industrial firms rather than utility firms. In addition, it is not revealed if the sample firms were capitalized on a 100% equity base as is Comsat. This method should not be accepted since the sample firms were not other enterprises having corresponding risks in relation to Comsat. 2. Dr. Carleton’s study estimated Comsat’s cost of equity