Mci Case Report

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Submitted By mqingjie
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Financial Strategy for Corporation

Case3
MCI Communications Corp., 1983

Estimation of external financing MCI requires until the end of 1987
MCI is the second-largest long-distance provider in the telecom industry of United States after AT&T. First of all, in this case we estimate external financing MCI requires until the end of 1987. Exhibit 9A provides the projected capital investment needs for the following year, so our group plug those data in Exhibit 3 corresponds to Funds from Operations and Use of Funds, then come up with the External Financing MCI needs from 1984 to 1987 by deducting the total Source from the total Use. By looking at each year’s needs, we noticed that the external needs will continue to grow because of the increase in projected market expansion and decreasing in operating margin, in addition, since telecom industry is very capital intensive, the increase of large amount of CAPEX required year by year is another factor that causes the external funds grow for the following time period. Then, we obtained the 10-year U.S. Treasury rate for 1983, which is around 10.46% and discount each year’s external fund back to 1983 using it as the discount rate for convenience. We got the final total external fund needed for the next five years is $1984.3 million. See Appendix A.

Analysis of MCI’s past financial strategy
MCI needs external funds to operation, which is the main financial policy. During the past 1972-1983, MCI has issued common stock, common stock warrant, convertible cumulative preferred stock, debenture and convertible debenture. With the call provision and the rising stock price, MCI converted those debentures to common stock successfully. Apparently, raising new equity will hurt shareholders’ value, so the cost of equity will be high. But convertible debentures have a lower interest…...

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