Mci Communications

In: Business and Management

Submitted By yetz78
Words 1543
Pages 7
Question 1: How effectively has MCI financed its needs in the past?

In looking through case data from Pg. 2 (68 of course-pack), Exhibit 2 and Exhibit 9A, we see that MCI has gone through two stages: 1. Startup stage from FY1972 through 1977, where the firm generated negative OI 2. Growth stage from FY1978 onwards where the firm started generating positive OI
The financing for the startup phase was performed predominantly through common stock as expected, followed by debt financing. During this stage, MCI had grossly under-estimated its cash requirements to support its build-out strategy which had led to the technical default. This had forced the firm to raise equity financing in an emergency mode, allowing it to survive.
During the growth stage (triggered by the success of Execunet), the need to obtain funds to support operations and capital investment dominated the firm’s financial policy. Wayne English’s perception was that raising funds by using common stock would cause dilution, and given the fact that this is the most expensive way of raising funds in the long-run, a choice was made to use convertible preferred stock. This is definitely less expensive compared to equity, and given the fact that the dividend was 85% tax-deductible to corporate purchasers without a significant loss of tax benefits; it was a good method to finance the operations.

One possible reason for a negative equity was that the company did not expect the uncooperative actions from AT&T which lead to significant delay in growth of revenue. MCI likely did not raise enough equity at the time.

In addition we observed that once operating income was positive and revenue was growing the company took on more debt and began to equalize the debt to equity. The ratio was coming down significantly over the period to end around 1.2.

Question 2: How much external capital is MCI…...

Similar Documents

Mci Communications

...Question 1: How effectively has MCI financed its needs in the past? In looking through case data from Pg. 2 (68 of course-pack), Exhibit 2 and Exhibit 9A, we see that MCI has gone through two stages: 1. Startup stage from FY1972 through 1977, where the firm generated negative OI 2. Growth stage from FY1978 onwards where the firm started generating positive OI The financing for the startup phase was performed predominantly through common stock as expected, followed by debt financing. During this stage, MCI had grossly under-estimated its cash requirements to support its build-out strategy which had led to the technical default. This had forced the firm to raise equity financing in an emergency mode, allowing it to survive. During the growth stage (triggered by the success of Execunet), the need to obtain funds to support operations and capital investment dominated the firm’s financial policy. Wayne English’s perception was that raising funds by using common stock would cause dilution, and given the fact that this is the most expensive way of raising funds in the long-run, a choice was made to use convertible preferred stock. This is definitely less expensive compared to equity, and given the fact that the dividend was 85% tax-deductible to corporate purchasers without a significant loss of tax benefits; it was a good method to finance the operations. One possible reason for a negative equity was that the company did not expect the uncooperative actions from AT&T......

Words: 310 - Pages: 2

Mci Communications

...required return on debt (r D ) and the required return on equity (r E ). To do this, an equity Beta for MCI is needed. This was done by comparing MCI returns to S&P 500 returns for a p eriod of 3 years and a period of 5 years. The Beta s were vastly different and so the Beta for the 3 yea r period was used so that the more current correlat ion could be used. MCI has been dramatically changing over the past 3 years and it would be more appropriate to use the more recent equity beta valu e. The equity beta value is 1.822 (Appendix 4). After calculating the beta, the next step is to ca lculate an Expected return on the market from equity investors. To do this, data from two differ ent S&P 500 data sets was used and the monthly returns were calculated. The average monthly retur n was near 1.00%, giving a compounded yearly 8 return of around 12.75%. This data is tabulated in Appendix 5 and Appendix 6. The data sets extend from 1980 to March 1983, similar to the beta calcul ation. The next step involves determining a risk-free rat e of return. This was calculated using the average return on the 13-week t-bill for the same 1 980 to 1983 period. The corresponding data is shown in Appendix 7 and the calculated risk-free ra te is 11.72%. Exhibit 7 from the case was used to calculate the required return on debt for MCI. The average return of the MCI bonds from 1980 to 1983 was taken and calculated to be r D = 12.46%. This is very high considering......

Words: 362 - Pages: 2

Mci Case Analysis

...MCI COMMUNICATIONS CORPORATION Introduction In 1982, the Justice department ordered the separation of ATT into local subsidiaries. MCI was one of the main competitors of AT&T and the impact of this new competition on MCI was uncertain. In this case the financial impact of this increased competition will be analyzed. Analysis of External Financing Needs for MCI from 1983 to 1989 Please see Exhibit 1 and Exhibit 2 MCI’s external needs will keep increasing over the next few years as the operating margins would shrink because of higher competition & higher access charges. In order to increase its market share, MCI would need to continue investing huge capitals in its network. As per exhibit 9 of the case, it is anticipated that MCI will increase its market share to 20 % in the next 6 years. The telecom industry is very capital intensive and in 1983 required $1.15 worth of investment in fixed plant & equipment for each extra $1 of revenue; that is first you have to build the network before you can sign up customers. The operating margin is expected to stabilize at 15% by 1990. But they are expected to vary substantially based on competition. It can go up to 22% or go down to 8%. Types of securities which were issued by MCI (1972-1983) 1. 2. 3. 4. 5. Common Stock Common Stock with warrant Convertible cumulative preferred stock - Cost Around 12.27 Debentures – Cost around 15% Convertible debenture – cost around 10% MCI initially issued equity in 1972 and later it......

Words: 1587 - Pages: 7

Mci Chapter3

...Chapter 2 – MCI Assignment Having had previous experience in a manufacturing plant, it seemed that I understood some of the basics of accounting. After reading this chapter, I saw different aspects I did not really take into account. Specifically, the idea of sunk cost, opportunity cost, out of pocket, these ideas were never something I thought of that would affect the business. Understanding these concepts, I see now how I could have applied them to my previous job. Understanding the cost of maintenance from both a short and long term, previous purchases, all of these different cost now made more sense with what I was able to control, direct and indirect material cost. I began to see the bigger picture of what it would take to run a plant. Applying these concepts to my business, MS Furniture Group, I begin with the different classifications of the cost that I will incur with my business, which can lead to cost saving opportunities for my overall bottom line. First step, I can classify my business as mass customization. I will have a high volume of training tables to produce, but offer different customization options, dependent on what the customer wants. This will help in delivering a quality product to customers that meet their specific needs. Looking at my direct cost of labor, I have a very controllable cost, that with improved management of labor, including better management of overtime, and labor per piece, I can look at some cost saving opportunity. I also have...

Words: 394 - Pages: 2

Mci Communications

...MCI Communications Corp., 1983 En abril de 1983, Wayne English, director financiero de MCI Communications Corp., se enfrentaba al problema de establecer una política financiera en un ambiente caracterizado por una gran demanda potencial de fondos externos y una gran incertidumbre en relación con el futuro de MCI. Esta compañía, que ofrecía servicios de telecomunicación a larga distancia en competencia con AT&T, había visto crecer sus ingresos de casi nulos en el año fiscal de 1974 (terminado el 31 de marzo de 1974), a más de 1.000 millones de dólares en 1983. Durante este período, MCI pasó de experimentar una pérdida de 38,7 millones de dólares en 1975, a obtener unos beneficios de 170,8 millones de dólares en 1983. Sólo en esos dos últimos años, el precio de las acciones se había multiplicado por cinco o más. Sin embargo, el acuerdo antimonopolio establecido en 1982 entre AT&T y el Departamento de Justicia de Estados Unidos había alterado de modo significativo las perspectivas económicas de MCI. El acuerdo, por el cual debía desmembrarse AT&T a principios de 1984, afectaría a MCI de dos modos muy importantes. Por una parte, ofrecía la oportunidad de aumentar enormemente el crecimiento, dado que AT&T tendría que competir por primera vez en los mismos términos de calidad de servicio con MCI. Por otra parte, el acuerdo creaba nuevas incertidumbres, ya que prometía eliminar ciertas ventajas de coste de MCI y aumentar la flexibilidad competitiva de AT&T. Sin......

Words: 3415 - Pages: 14

Mci Case

...MCI COMMUNICATIONS CORPORATION Introduction In 1982, the Justice department ordered the separation of ATT into local subsidiaries. MCI was one of the main competitors of AT&T and the impact of this new competition on MCI was uncertain. In this case the financial impact of this increased competition will be analyzed. Analysis of External Financing Needs for MCI from 1983 to 1989 Please see Exhibit 1 and Exhibit 2 MCI’s external needs will keep increasing over the next few years as the operating margins would shrink because of higher competition & higher access charges. In order to increase its market share, MCI would need to continue investing huge capitals in its network. As per exhibit 9 of the case, it is anticipated that MCI will increase its market share to 20 % in the next 6 years. The telecom industry is very capital intensive and in 1983 required $1.15 worth of investment in fixed plant & equipment for each extra $1 of revenue; that is first you have to build the network before you can sign up customers. The operating margin is expected to stabilize at 15% by 1990. But they are expected to vary substantially based on competition. It can go up to 22% or go down to 8%. Types of securities which were issued by MCI (1972-1983) 1. 2. 3. 4. 5. Common Stock Common Stock with warrant Convertible cumulative preferred stock - Cost Around 12.27 Debentures – Cost around 15% Convertible debenture – cost around 10% MCI initially issued equity in 1972 and later it......

Words: 1587 - Pages: 7

Mci Communications

...MCI Communications Corp. BACKGROUND MCI Communications Corp., a long distance telecommunications company, had been a sluggish performer in a buoyant market, and the management sensed a growing restlessness on the part of shareholders. To enhance the shareholders’ value, the company planned to repurchase some of its outstanding common stock. To guide the management in its decision, the company sought the advice of Lynch Investments in establishing a program to repurchase some of its outstanding common stocks. This leads to Katzu Mizuno, an associate of Lynch Investments, to investigate what source of fund is appropriate for the repurchase program and the possible effect of such action in the company. CASE ANALYSIS This case analysis aims to answer the following problem: How should the company finance its plan to repurchase its outstanding common stock in order to enhance its shareholder value? The company will be less flexible if it would have a debt-equity ratio of 72%. But since the said D/E ratio would “still be moderate with respect to the industry”, MCI’s bond rating won’t go below a medium grade of BBB. MCI needs to unlevered and then re-lever the target company’s equity beta. Unlevering the target’s equity beta yields an estimated beta comparable to the other major competitors which have different debt structure (see Exhibit B). Thus, re-levering this equity beta to reflect MCI’s target capital structure yields the appropriate risk for MCI to use in estimating a......

Words: 861 - Pages: 4

Mci Case Analysis

...Case 10: MCI Communication Corp. ------------------------------------------------- MCI External Financing Needs from 1984 to 1989 Due to the telecom industry’s competitive history, MCI has to continue growing to maintain and increase their market share. Their external financing needs will keep increasing over the next few years as the operating margins shrink in an attempt to acquire 20% market share by 1990. To accomplish this, MCI will need to infuse huge capitals into their business. As per the pro forma statements, MCI would need significant amounts of capital to finance their plans. The figures range from $890 million in 1984 to $2.76 billion in 1987. Looking back at history, MCI has been known for issuing stock and debentures/convertible debentures. To finance their forecasts, MCI will begin by selling $481 million in common stock in 1984 the same way it did in the past. The share price is currently $47 per share and MCI needs to capitalize on the high value while it can. From 1985 to 1989, MCI will sell convertible debentures. A Convertible debenture is a type of loan issued by a company that can be converted into stock by the holder and, under certain circumstances, the issuer of the bond. The debentures allow investors to turn them into stock while at the same time allow MCI to issue more debt. Thus, each year from 1985 to 1989, MCI can take on more debt while converting older ones. The additional cash will provide for MCI’s growth plans and allow......

Words: 926 - Pages: 4

Mci Case Study

...MCI Communications Corporation FOUNDED: 1968 Contact Information: HEADQUARTERS: 1801 Pennsylvania Ave. Washington, DC 20006 PHONE: (202)872-1600 FAX: (202)887-3140 URL: http://www.mci.com OVERVIEW MCI is the second-largest long-distance provider in the United States after AT&T. It is a leader and innovator in the telecommunications industry. MCI was instrumental in forging an opening in that industry for companies to compete with AT&T. It continued in the late 1990s to lead all others except for AT&T, which had held an industrywide monopoly until the 1980s. The company, located just a few blocks from the White House, has offices in 300 locations around the world, and competes in a wide variety of communication service markets. In 1997, the global long-distance company World-Com Inc. made a $30-billion bid to buy MCI. GTE made a $28 billion offer. After some negotiation, MCI agreed to a $37-billion purchase by WorldCom. The merger was announced November 10, 1997 and the new company will be named MCI WorldCom. COMPANY FINANCES Upon announcing the merger of MCI and World-Com Inc., the combined firms projected over $30 billion in revenues for 1998. In 1997 MCI had net income of $209 million on revenue of $19.65 billion, as compared to 1996 when net income was __BODY__.20 billion on revenue of $18.49 billion. This was a considerable increase over 1995 income of $548 million on $15.26 billion in revenues. Earnings per share of stock rose from $.80 in......

Words: 2340 - Pages: 10

Verizon Mci Acquisition

... Re.: “MCI Takeover Battle” Case Analysis Attached is an analysis of “The MCI Takeover Battle: Verizon versus Qwest” I. STRATEGIC PROFILE This case profiles MCI’s merger debate between Verizon and Qwest in 2005. At this time, many other companies are merging due to the industry consolidation, therefore forcing MCI to keep up with its competition. MCI was acquired after a bidding war between WorldCom, British Telecom and GTE, with the winning bid being a $37 billion offer from WorldCom. MCI-WorldCom then acquired many other communication companies excluding Sprint due to a U.S. Justice Department ruling. WorldCom operated throughout its filing of bankruptcy, resulting with MCI being not only the surviving company, but one of the most extensive networks in the world. After posting losses in 2004, MCI must undergo a strategic process in which to choose the better bid, Verizon or Qwest, in order to stay on top of the industry. II. SITUATION ANALYSIS Many general environmental trends are effecting Verizon, Qwest, and the communications industry as a whole. The always changing technological needs are shifting from landlines to wireless, where Verizon has seen about one in five people using their wireless phones as their primary forms of communication. However, Qwest is still generating a strong majority of its revenue from their wireline segment, and will therefore have to eventually undergo the process of shifting to wireless. Demographics also play a large role in the......

Words: 1276 - Pages: 6

Mci Case Report

...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......

Words: 1197 - Pages: 5

Mci Communications

...MCI COMMUNICATIONS CORPORATION Introduction In 1982, the Justice department ordered the separation of ATT into local subsidiaries. MCI was one of the main competitors of AT&T and the impact of this new competition on MCI was uncertain. In this case the financial impact of this increased competition will be analyzed. Analysis of External Financing Needs for MCI from 1983 to 1989 Please see Exhibit 1 and Exhibit 2 MCI’s external needs will keep increasing over the next few years as the operating margins would shrink because of higher competition & higher access charges. In order to increase its market share, MCI would need to continue investing huge capitals in its network. As per exhibit 9 of the case, it is anticipated that MCI will increase its market share to 20 % in the next 6 years. The telecom industry is very capital intensive and in 1983 required $1.15 worth of investment in fixed plant & equipment for each extra $1 of revenue; that is first you have to build the network before you can sign up customers. The operating margin is expected to stabilize at 15% by 1990. But they are expected to vary substantially based on competition. It can go up to 22% or go down to 8%. Types of securities which were issued by MCI (1972-1983) 1. 2. 3. 4. 5. Common Stock Common Stock with warrant Convertible cumulative preferred stock - Cost Around 12.27 Debentures – Cost around 15% Convertible debenture – cost around 10% MCI initially issued equity in 1972 and later it......

Words: 1590 - Pages: 7

Mci Ocm

...Question 1: How effectively has MCI financed its needs in the past? In looking through case data from Pg. 2 (68 of course-pack), Exhibit 2 and Exhibit 9A, we see that MCI has gone through two stages: 1. Startup stage from FY1972 through 1977, where the firm generated negative OI 2. Growth stage from FY1978 onwards where the firm started generating positive OI The financing for the startup phase was performed predominantly through common stock as expected, followed by debt financing. During this stage, MCI had grossly under-estimated its cash requirements to support its build-out strategy which had led to the technical default. This had forced the firm to raise equity financing in an emergency mode, allowing it to survive. During the growth stage (triggered by the success of Execunet), the need to obtain funds to support operations and capital investment dominated the firm’s financial policy. Wayne English’s perception was that raising funds by using common stock would cause dilution, and given the fact that this is the most expensive way of raising funds in the long-run, a choice was made to use convertible preferred stock. This is definitely less expensive compared to equity, and given the fact that the dividend was 85% tax-deductible to corporate purchasers without a significant loss of tax benefits; it was a good method to finance the operations. One possible reason for a negative equity was that the company did not expect the uncooperative actions from......

Words: 335 - Pages: 2

Mci Finance Case

...MCI COMMUNICATIONS CORPORATION Introduction In 1982, the Justice department ordered the separation of ATT into local subsidiaries. MCI was one of the main competitors of AT&T and the impact of this new competition on MCI was uncertain. In this case the financial impact of this increased competition will be analyzed. Analysis of External Financing Needs for MCI from 1983 to 1989 Please see Exhibit 1 and Exhibit 2 MCI’s external needs will keep increasing over the next few years as the operating margins would shrink because of higher competition & higher access charges. In order to increase its market share, MCI would need to continue investing huge capitals in its network. As per exhibit 9 of the case, it is anticipated that MCI will increase its market share to 20 % in the next 6 years. The telecom industry is very capital intensive and in 1983 required $1.15 worth of investment in fixed plant & equipment for each extra $1 of revenue; that is first you have to build the network before you can sign up customers. The operating margin is expected to stabilize at 15% by 1990. But they are expected to vary substantially based on competition. It can go up to 22% or go down to 8%. Types of securities which were issued by MCI (1972-1983) 1. 2. 3. 4. 5. Common Stock Common Stock with warrant Convertible cumulative preferred stock - Cost Around 12.27 Debentures – Cost around 15% Convertible debenture – cost around 10% MCI initially issued equity in 1972 and later it......

Words: 1587 - Pages: 7

Mci Fraud

...Case 1: The Fraud Continues July 17, 2011 Abstract Focusing on the internal control weaknesses that existed at MCI, which contributed to the commission of Walt Pavlo’s famous multi-million dollar fraud. Discussing the approach that should have been taken if fraud was suspected and applying one theory related to crime causation of this case. As well as critiquing the ethical behavior of Pavlo and MCI – discussing what actions could have been taken to prevent the crime. 1. Discuss the internal control weaknesses that existed at MCI that contributed to the commission of this fraud. When we listen to Pavlo and outside sources, like ethics professor Stephen Henn in his book “Business Ethics,” we hear of employees concealing bad debt in Pavlo’s department. It seems that “unethical decisions were commonplace” (Henn 2009). We see an upper management that, when notified of large amounts of bad debt, completely denied any problem. Pavlo states, “I sent a memo to senior staff telling them that we had about $180 million of bad debt…. and asking how we were going to address it…The response was that the bad debt budget…was going to remain at $15 million and that we would just have to work through whatever issues we had.” (Jacka 2004) An ‘Internal Auditor” article from 2004 goes on to report that in one account “a customer who owed MCI US $100 million was allowed to sign a promissory note, which turned the receivable into a short-term asset.” These examples are perhaps the......

Words: 1953 - Pages: 8