Lessons in Corporate Finance

CHAPTER 9 Financial Policy Decisions (AT&T: Before and After the 1984 Divestiture)

In this chapter, we are going to discuss financial policies again. This chapter should be read after the chapters on Marriott, where we introduced how financial policies are used to implement financial strategy. Financial policies are an area of corporate finance not typically emphasized in entry-level finance textbooks. We will discuss concepts that investment banks use in doing advisory work. Firms call up their investment bank and ask for advice about setting dividend policy or about achieving a particular bond rating. These are questions a firm asks on an ad hoc basis, although probably not often enough. The questions involve decisions that are made at the CFO level of the firm.

This chapter is not conceptually difficult, but it is complicated because of the number of moving parts. The focus of most finance jobs, in either a firm’s corporate finance department or in an investment bank, involves valuations and is transaction oriented. Thus, most of a finance professional’s time is spent using models to value potential investments, either in new plants or in corporate acquisitions.

In this chapter, we are going to review and provide some more practical examples of financial policies. We will explore the financial policies of the “old” AT&T (before the break up on January 1, 1984) to determine how well the firm’s financial policies met its financing needs. Then we will briefly examine the “new” ...