MCI Communications Draft V11

Topics: Corporate finance, Bond, Preferred stock Pages: 6 (1524 words) Published: February 23, 2015
Question 1:

MCI’s management is committed to a growth program and they are willing to sacrifice profit margins to achieve it. Consequently, the company’s external financing requirements will likely increase in years to come. Basing our projections off of the exhibits and assumptions provided in the case, we estimate MCI’s will invest approximately $3.8B over the next four years (1984-1987) of which $3.3B will need to come from external sources. As capital expenditures outstrip funds from operations, undoubtedly the company will need to seek further capital from the financial markets (Exhibit 1).

However, these external financing needs could vary considerably. For one, as the antitrust settlement between AT&T and the U.S. Department of Justice mandates the breakup of AT&T by early 1984, both growth opportunities and cost uncertainties simultaneously increase for MCI Communications. MCI could certainly gain by having equal quality of access to all local telephone companies, but to what extent is difficult to assess. By FY1990, MCI market share is forecasted to hit 20%, however, this number is contingent upon other competitors in the market and the market itself as it adapts to the shock of competition. If market share increases more dramatically or more rapidly than predicted, MCI could have increased external financing needs in order to support additional capacity requirements. On the other hand, if future market share is less than forecasted, capital expenditures could decrease providing a reduction to the external financing requirements. On another note, MCI’s access charges are forecasted to increase by 80% in 1984, but are expected to taper off in FY1990. As these numbers are just estimates, any deviation could drastically impact MCI’s profitability and consequently their outside capital requirements. Additionally, it is forecasted that legislation in Congress will forbid MCI to pass these direct access charges onto households and businesses, however, if Congress rules in the telecommunication company’s favor, these pass-through charges could reduce their external capital needs. MCI’s capital requirements could also vary based upon their actual capital expenditures. Capital expenditures are MCI’s biggest cash drain and any deviation from the estimate to the actual investment factor will directly impact the amount of capital needed to build out infrastructure. Finally, another varying factor could be impacted by the FCC mandated city-by-city elections where voting consumers elect their preferred long distance carrier for their local market. External capital requirements could exceed the estimate if MCI is chosen as the preferred carrier in all cities or if the company is chosen in cities where current infrastructure is not in place. Question 2:

Through 1976, the company’s financial policy consisted of raising capital predominantly for continuing operations. Two and a half years after MCI was organized, the company incurred enormous fixed costs through the growth of their communications network to 30 metropolitan areas with 5,100 route-miles of transmission circuits. As a start-up telecommunications company with limited capital, these costs were majorly funded through the issuance of common stock, a credit line from a syndicate headed by the First National Bank of Chicago and subordinated notes from private investors. Dependent upon AT&T facilities to carry calls from its subscribers to MCI transmission centers, MCI was unable to generate significant subscriber revenue to justify the accumulated operating expenses that accompanied the newly built and growing communications network. By 1975, MCI was in technical default and their working capital had decreased $7.7M from FY 1974 to FY1975 to ($7.4M), making the company unable to meet its short-term liabilities with its current assets. Between the 1976 court order preventing the extension of Execunet service to new customers and the...
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