Comsat 15 Part 1
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Transcript of Comsat 15 Part 1
Fin 203, Kihlstrom: Notes on Comsat 1
Comsat's Evolution
Incorporated in February 1963 as a private
company representing the US in a
“worldwide satellite company”
Goal specified in ‘62 Communications
Satellite Act: establish a commercial
satellite system as part of global network
Act specified other obligations of Comsat
Improved quality communications
Reduced charges
Fin 203, Kihlstrom: Notes on Comsat 2
Comsat's Evolution
Subject to FCC regulation
Received technological assistance from
NASA
Received diplomatic assistance from the
state department
Some US presidential oversight
Fin 203, Kihlstrom: Notes on Comsat 3
Comsat's Evolution
Issued $200 million in Equity in June 1964
Envisioned high start-up costs and low
initial operating revenues
First commercial satellite launched in April
1965 and established service in June, 2
years ahead of schedule
Fin 203, Kihlstrom: Notes on Comsat 4
Early operations in mid and late 60's were
successful
first operating profit in 4th quarter of 1967
(p.4)
Comsat's Evolution (continued)
Fin 203, Kihlstrom: Notes on Comsat 5
Comsat's Evolution (continued)
Early success of synchronous technology
resulted in cost savings (footnote 17, p. 9) no need to exploit alternative technology
resulted in less investment in operations than
initially envisioned
Fin 203, Kihlstrom: Notes on Comsat 6
Comsat's Evolution (continued)
Initially most of Comsat’s assets were
Cash and Marketable securities its income came mostly from the return to
these investments (see slides to follow)
The risks it face were the risks associated
with these kinds of investments (come back to
this)
Even at this time investors knew that Comsat
was committed to using these funds to invest
in operations
Fin 203, Kihlstrom: Notes on Comsat 7
Comsat's Evolution (continued)
Later more of Comsat’s assets were
invested in operations Most of its income then came from its
operations (see the slides below)
The risks it then faced were the risks
associated with its operations (come back to
this)
Fin 203, Kihlstrom: Notes on Comsat 8
Comsat's Evolution: Its Assets
EX 4
1967 1968 1969 1970 1971 1972 1973 1974
PPE 70.6 103.1 138.5 182.5 208.6 210.3 395.6 430.2
mktable secs 155.6 134.1 102.1 100.6 104.7 95 129.9 49.7
secs/Assets 0.69 0.57 0.42 0.36 0.33 0.31 0.25 0.10
Fin 203, Kihlstrom: Notes on Comsat 9
Comsat's Evolution: Its Income
Exhibit 3 1968 1972 1973 1974
$million $million $million $million
Operating Income 2.2 43.4 59.5 73.7
% of total income 17.60% 91.18% 84.52% 85.50%
Interest income 8.6 4.5 8.8 7.4
% of total income 68.80% 9.45% 12.50% 8.58%
other income 1.7 -0.3 2.1 5.1
Total pretax income 12.5 47.6 70.4 86.2
Fin 203, Kihlstrom: Notes on Comsat 10
Comsat's Evolution (continued)
Income from leases grew from 20% in 1965
to 90% in 1971
40% revenue growth from 1965 to 74 (p.4)
The fraction of assets held as marketable
securities fell from 96% in 1964 to 8.9% in
1974
Fin 203, Kihlstrom: Notes on Comsat 11
The 1975 Hearings Initiated in 1965
In response to a Comsat rate request
Goal: determine how Comsat should be
regulated
Formal hearings began in 1972
To determine whether the rates charged by
Comsat since its formation were too high
Refunds were admitted as possible
Also to determine how future rates should
be set
Fin 203, Kihlstrom: Notes on Comsat 12
Comsat Issues
What rate of return For regulatory purposes
What rate base For regulatory purposes
Related to and should be consistent with the
decision on rates
Fin 203, Kihlstrom: Notes on Comsat 13
What Rate of Return?
Same for regulatory and investment
purposes return sufficient to attract investors
risk free rate plus risk premium to compensate
investors for risks they take
Fin 203, Kihlstrom: Notes on Comsat 14
Hope case decision "..the return to equity
should be commensurate with returns on
investments in other enterprises having
commensurate risks." (p.5)
Carleton (FCC Staff) testimony "Risk premium
(to shareholders) equals the additional return
investors require for bearing the business and
financial risks of the firm's equity.
What Rate of Return? (continued)
Fin 203, Kihlstrom: Notes on Comsat 15
What Rate of Return?: (continued)
A rate was needed for the early years 1964-
1968
A perhaps different rate might be needed for
the later years
Why these rates might be different
Different risks faced by Comsat’s
investors in the early and late years
Different interest rate environments Different rate levels
The Proposed Rates
Fin 203, Kihlstrom: Notes on Comsat 16
Proposed Rates of Return
Comsat* FCC* 10 Treas
Yield**
1964 4.91%
1967 5.07%
1970 7.35%
1971 6.16%
1964-71 12% 7%
1972 12% 8.33% 6.21%
1973 12% 8.70% 6.85%
1974 12% 9.15% 7.56%
1975 15% 9.42% 7.99%
* Case Exhibit 1
** 2011 Economic Report of the President
Fin 203, Kihlstrom: Notes on Comsat 17
What Risk Premium?
What risks do investors face? CAPM: risks added to portfolio by the
investment
systematic risks
not diversifiable risks
Fin 203, Kihlstrom: Notes on Comsat 18
What Risk Premium? (continued)
How do we measure the risk premium
required by investors? Possibilities: Use historical returns for comparable firms
Carleton's dividend growth model applied
using AT&T's experience (p. 11)
Brigham's estimates based on returns
earned by industrial firms and utilities (pp 9-
10)
Fin 203, Kihlstrom: Notes on Comsat 19
What Risk Premium? (continued)
Use CAPM (Myers pp11-12)
Use beta to measure risks
In the later years
Use the betas Myers calculates for
Comsat
In the early years investors didn’t have
Comsat’s experience to use
What beta do we use when Comsat's
isn't available?
CAPM
• Will need to get the risk free rate
– See the Economic Report of the President
• Will need to get beta
• Will also need to get the Equity Market Risk
Premium (EMRP)
– For information on possible EMRP see Exhibit 6
of the Midland case
Fin 203, Kihlstrom: Notes on Comsat 20
fmofo rErrEr
fm rErEMRP
Fin 203, Kihlstrom: Notes on Comsat 21
A risk premium for Comsat after
1970
To get a risk premium for use say in 1975
we use the CAPM and the Comsat betas
computed by Myers for 1964-70.
Compute a beta for Comsat's Operations Use Myer's estimates for Comsat's equity
beta
Because Comsat has no debt Comsat's equity
beta equal's its asset or it’s operations beta
Fin 203, Kihlstrom: Notes on Comsat 22
Comsat’s Beta
Comsat’s beta as measured from 1964 to
1967 measures the systematic risks
Comsat’s investors had borne during those
years Use Myer's estimates For Comsat's equity
beta (Exhibit 9)
Because Comsat has no debt Comsat's equity
beta equal's its asset beta
Fin 203, Kihlstrom: Notes on Comsat 23
We treat Comsat's assets as a portfolio which
includes
Marketable securities
Assets invested in operations (PP&E)
Comsat's asset beta is the beta of its portfolio of
investments in operations and marketable securities
Compute a beta for Comsat's Operations
Comsat’s Asset Beta
Fin 203, Kihlstrom: Notes on Comsat 24
Comsat's Evolution
EX 4
1967 1968 1969 1970 1971 1972 1973 1974
PPE 70.6 103.1 138.5 182.5 208.6 210.3 395.6 430.2
mktable secs 155.6 134.1 102.1 100.6 104.7 95 129.9 49.7
secs/Assets 0.69 0.57 0.42 0.36 0.33 0.31 0.25 0.10
Fin 203, Kihlstrom: Notes on Comsat 25
Comsat's Portfolio of Investments
The portfolio changed over time (Ex 4) Marketable securities were roughly 70% of
Comsat’s assets in 1967
Marketable securities were about 40% of
Comsat's assets in 1969-70
Fin 203, Kihlstrom: Notes on Comsat 26
Comsat’s estimated beta for 1964-67 was
1.4
Comsat’s estimated beta for 1967-70 was
1.8
If Comcast’s operations have a higher beta
than it’s marketable securities this change in
the beta occurs because more of its assets
are invested in operations
How the Risks of Comsat's Asset
Portfolio Evolved
Fin 203, Kihlstrom: Notes on Comsat 27
Deriving the beta on Comsat's
operations
Assume that the beta on Comsat's portfolio
of marketable securities is one
securities marketablein
invested assets offraction sf
Fin 203, Kihlstrom: Notes on Comsat 28
1967: 30% of assets invested in
operations, beta 1.4
33.2
3.17.4.1
o
o
oossA ff
Fin 203, Kihlstrom: Notes on Comsat 29
1970: 60% of assets invested in
operations, beta 1.8
33.2
6.14.8.1
o
o
oossA ff
CAPM
• Will need to get the risk free rate
– See the Economic Report of the President
• Will need to get beta
• Will also need to get the Equity Market Risk
Premium (EMRP)
– For information on possible EMRP see Exhibit 6
of the Midland case
Fin 203, Kihlstrom: Notes on Comsat 30
fmofo rErrEr
fm rErEMRP
Fin 203, Kihlstrom: Notes on Comsat 31
To start, we’ll use the operations beta we obtained of
2.33
We’ll use the 1975 10 year T-bond rate of 7.99% Comsat’s investments are long term investments
This is the longest term government bond outstanding in
1975
For EMRP use 7.5% (Historical average 1926-75)
Using the CAPM to get the required
return on Comsat's operations: 1975
fmofo rErrEr
Fin 203, Kihlstrom: Notes on Comsat 32
Using the CAPM to get the required
return on Comsat's operations:1975
.42%9 rateComsat Proposed
15% rateComsat Proposed
%47.25
%48.17%99.7
%5.7*33.2%99.7
fmofo rErrEr
Historical Market Risk Premia
S&P 500 over LT Gov’ts
Fin 203, Kihlstrom: Notes on Comsat 33
1926-1929 1930s 1940s 1950s 1960s 1970s 1980s 1990s 1987-1996
17.6 2.3 8.0 1 7.9 4.2 0.3 7.9 7.9 8.3
Ibbotson Associates
Fin 203, Kihlstrom: Notes on Comsat 34
We’ll now use Myer’s estimate, 1.8, of Comsat’s beta
for 1970
We’ll use the 1975 10 year T-bond rate of 7.99%
For EMRP use 7.5% (Historical average 1926-
75)
Using the CAPM to get the required
return on Comsat's assets: 1975
fmAfA rErrEr
Fin 203, Kihlstrom: Notes on Comsat 35
Using the CAPM to get the required
return on Comsat's assets:1975
%42.9 rateComsat Proposed
%15 rateComsat Proposed
%49.21
%5.13%99.7
%5.7*8.1%99.7
fmAfA rErrEr
Fin 203, Kihlstrom: Notes on Comsat 36
We’ll again use the operations beta we obtained of
2.33
We’ll use the 1970 10 year T-bond rate of 7.35%
For EMRP use 7.5% (Historical average 1926-
75)
Using the CAPM to get the required
return on Comsat's operations: 1970
fmofo rErrEr
Fin 203, Kihlstrom: Notes on Comsat 37
Using the CAPM to get the required
return on Comsat's operations:1970
%7 rateComsat Proposed
12% rateComsat Proposed
%83.24
%48.17%35.7
%5.7*33.2%35.7
fmofo rErrEr
Fin 203, Kihlstrom: Notes on Comsat 38
We’ll now use Myer’s estimate, 1.8, of Comsat’s beta
for 1970
We’ll use the 1970 10 year T-bond rate of 7.35%
For EMRP use 7.5% (Historical average 1926-
75)
Using the CAPM to get the required
return on Comsat's assets: 1970
fmAfA rErrEr
Fin 203, Kihlstrom: Notes on Comsat 39
Using the CAPM to get the required
return on Comsat's assets:1970
%7 rateComsat Proposed
%12 rateComsat Proposed
%85.20
%5.13%35.7
%5.7*8.1%35.7
fmAfA rErrEr
Fin 203, Kihlstrom: Notes on Comsat 40
We’ll first use the operations beta we obtained of
2.33
We’ll use the 1967 10 year T-bond rate of 5.07%
For EMRP use 7.5% (Historical average 1926-
75)
Using the CAPM to get the required
return on Comsat's operations: 1967
fmofo rErrEr
Fin 203, Kihlstrom: Notes on Comsat 41
Using the CAPM to get the required
return on Comsat's operations:1967
%7 rateComsat Proposed
12% rateComsat Proposed
%55.22
%48.17%07.5
%5.7*33.2%07.5
fmofo rErrEr
Fin 203, Kihlstrom: Notes on Comsat 42
We’ll now use Myer’s estimate, 1.4, of Comsat’s beta
for 1967
We’ll use the 1967 10 year T-bond rate of 5.07%
For EMRP use 7.5% (Historical average 1926-
75)
Using the CAPM to get the required
return on Comsat's assets: 1967
fmAfA rErrEr
Fin 203, Kihlstrom: Notes on Comsat 43
Using the CAPM to get the required
return on Comsat's operations:1967
%7 rateComsat Proposed
12% rateComsat Proposed
%57.15
%5.10%07.5
%5.7*4.1%07.5
fmAfA rErrEr
Fin 203, Kihlstrom: Notes on Comsat 44
For the purpose of getting a rate for the
early years say, for example 1965, we use
firms that face comparable risks How do Comsat's risks compare to those faced
by other firms?
How does leverage affect the comparison?
Using The Experience of Other Firms
To Estimate Comsat’s Risk and Risk
Premia
Fin 203, Kihlstrom: Notes on Comsat 45
What Firms Face Comparable Risks?
ATT Equity (Carleton and Myers)
The 602 Industrial firms and 56 utilities on
S&P's compustat files (Brigham)
The utilities involved in the 4 cases cited in
the 1964 Anderson study (Brigham)
Fin 203, Kihlstrom: Notes on Comsat 46
What Firms Face Comparable Risks?
(continued)
The telephone and telegraph companies
involved in the 94 cases cited in the 1970
Anderson study (Brigham)
Major firms in other industries (Myers)
Electric utilities and natural gas pipelines
(Myers)
Major airlines (Myers)
Fin 203, Kihlstrom: Notes on Comsat 47
What Risks are Faced by Comsat?
Technological risk (p. 6)
Business risk (p. 6) Startup risks
Government mandate effect?
Demand risk (p.6)
Competitive risks (p. 7) customers are competitors
Regulatory risk (p. 7)
Fin 203, Kihlstrom: Notes on Comsat 48
What Risks are Faced by Comsat?
(continued)
Political or international risks (p. 7)
Financial risk (pp. 6-7)
Fin 203, Kihlstrom: Notes on Comsat 49
Technological risk Probably not systematic
Different from those of ATT and other utilities
Business risk Startup risks
diversifiable?
effect of government mandate?
Some similar to those of ATT
Types of Risks Faced by Comsat
Fin 203, Kihlstrom: Notes on Comsat 50
Demand risk Systematic
Similar to AT&T's
Maybe similar to other utilities
Types of Risks Faced by Comsat
(continued)
Fin 203, Kihlstrom: Notes on Comsat 51
Types of Risks Faced by Comsat
(continued)
Competitive risks Systematic? In bad times competition might
become more severe
Effect of having competitors as customers?
Monopoly in market for color TV transmission,
but not phone service (p. 4)
Superior service advantage (p.4)
Fin 203, Kihlstrom: Notes on Comsat 52
Types of Risks Faced by Comsat
(continued)
Regulatory risk probably not systematic
Similar to AT&T's and other utilities
Political or international risks Systematic?
Similar to AT&T's
Fin 203, Kihlstrom: Notes on Comsat 53
Types of Risks Faced by Comsat
(continued)
Financial Risks Comsat has no debt and faces no financial
risks
Other firms in the suggested comparison
groups are levered
must be accounted for when comparing
Fin 203, Kihlstrom: Notes on Comsat 54
Getting a risk premium for Comsat
Using AT&T’s Experience
AT&T risks are reasonably comparable to
Comsat
We’ll use AT&T beta to get a risk premium
for Comsat
We’ll have to adjust for the fact that AT&T is
levered and Comsat is not