Gordon's Position on AT&T's Capital Structure

A utility company is allowed to charge prices high enough to cover all costs, including its cost of capital. Public service commissions are supposed to take actions to stimulate companies to operate as efficiently as possible in order to keep costs, hence prices, as low as possible. Some time ago, AT&T's debt ratio was about 33 percent. Some people (Myron J. Gordon in particular) argued that a higher debt ratio would lower AT&T's cost of capital and permit it to charge lower rates for telephone service. Gordon thought an optimal debt ratio for AT&T was about 50 percent.

Do the theories presented in Chapters 14 and 15 or Corporate Finance 2nd edition by Roos, Westerrfield, Jaffe and Jordon support or refute Gordon's position?

Solution Summary

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