Mci Communications Case Study Solution Report

Case 4 Analysis MCI Communications Corp., 1983 Advanced Corporate Finance MW 2:00-3:15 PM Question 1: As MCI seeks to steal market share from AT&T post anti-trust litigation and enforcement of the equal-access rules, MCI plans on making huge capital expenditures to expand new capacity and replace old capacity on its network. Using an estimated discount rate of 10%, the PV of necessary funding is roughly $1.223 billion for the next ten years. Attached to this case is our analysis of MCI’s funding needs over the decade. Question 2: MCI’s current capital structure relies upon converting the company’s debt to common equity stock when the firm does well. This convertible debt comes as a form of cheap financing for MCI with 8% lower coupon rates for similar amount issues. MCI’s current capital structure is misleading. Since the debt comes with low interest rates and is expected to convert to equity as the stock outperforms, the firm has deluded itself into leveraging up beyond its expansion capacity. As it is almost at maximum leverage, the company needs to find alternative forms of financing. Straight debentures will not be possible as their interest rates on most recent issues have been too high and convertible debentures seems unlikely due to the size of funding required by MCI and the fact that the new interest payments would decrease the interest coverage ratio from 4.2x to 1.75x.As access charges are expected to spike the next few years, this

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The MCI’s source of funds has been emission of stocks. Common stocks as IPO of 6M shares and $27.070.000,00. An issue of 9.600.000,00 common stock 5 years warrant attached.

 What have been MCI sources of funds in the past (1972-1983)? What’s your opinion?
Around 1972 MCI issued equity and later on time when the company started going well they issued debentures and convertible debentures. The main raison to do that is because equity cost use to be higher. First of all they issued debentures but they realise that the convertible debentures had lower cost of capital and they started issuing them. Due to the high growth of the company the stock price rise a lot during the time and therefore they converted the convertible debentures to…show more content…

81 82 83 84 85 86 Revenues 1073 1850 3160 4870 EBIT 24 129 241 265,1 291,61 320,771
- tax 5 43 70 83 58 123
- A Working Capital 9,3 67,3 349,3 384,23 422,653 464,9183
- Capex 128 209,5 704,7 717 1195 1519 FCF -118,3 -190,8 -883 -919,13 -1384,04 -1786,15

If we look throw the Free Cash Flow forecast, we can expect negative figures for next years, and with the intensive needs of capital of this kind of industry and in 1983 required $1.15 worth of investment in fixed plant & equipment for each extra $1 of revenue. This factor would be expected to fall by 1990 to 1,0 to 1,0 parity.
In those forecasts we can see the effect of high needs of investments and consequently the needs of external financing. This values of high investments are excepted to continue high until 1990 but there is a possible fall after 1987 as well.
 What is your opinion about MCI current capital structure? What should be MCI capital structure in the future?
In 1983 the telecom industry was affected by several changes in regulation. As we read in the case the main company has been obliged to divide itself into smaller companies and to get a competitive market the costs were being established at the same level for everyone. This is a period of great opportunity of getting higher market share for MCI. They had a capital structure of around 55% of leverage and the financing challenges MCI should face during the

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