Divisional Hurdle Rates and the Cost of Capital

Abstract

Samuel C. Weaver: For about the past six years I have been involved as a practitioner with the questions of how to set divisional hurdle rates and project hurdle rates. Today we are going to talk about just that. Jack will present first, then Pete, Bruce, and I will follow. Jack, will you begin? Jack A. Gunn: Good morning. Southwestern Bell is one of the largest holding companies, with many subsidiaries. Southwestern Bell Telecom is our subsidiary that sells equipment in the residential and business areas. When we purchased Metromedia Paging, the paging and cellular operations were split. The cellular operation went to Mobile Systems, and we retained the paging division. We own Gulf Printing Company. We have a new subsidiary technology resource, which is where all the engineers and those people interested in applications for telephone services are employed. We have a capital corporation that takes care of issuing bonds and stocks as required. We have an asset management organization, and we have Southwestern Bell Corporation, which is primarily the legal and lobbying operation in Washington, DC. In 1987 we made a little over $8 billion in gross revenue, and netted $1.047 billion. Telecom is the largest part of the company right now, and as the cellular division continues to grow, we can expect some revenue growth. We have $21.5 billion in assets. The telephone company is responsible for about $18.5 billion of those assets, and so is by far the largest subsidiary. We have a debt ratio in the low 40s with long-term debt and equity about $8 billion.