Mci Case Solution

MCI Communications Corp.

1983

Executive Summary

MCI has been providing long distance telecommunication services for several years. The company has seen its revenue grow from almost nothing in FY1974, to more than $1 billion in FY1983. The company has had problems from AT&T unfairly using its monopoly and from the FCC passing regulation against MCI’s services. Each time this has happened, the courts have ruled in MCI’s favor, and MCI has continued to grow. Recently, the FCC has broken up the AT&T monopoly and forced it to compete on fairer terms. This has given MCI the opportunity to steal a large chunk of market share from AT&T, but MCI would need to obtain funds and grow in order to do this. The company has raised capital in the past by issuing convertible preferred stock and debentures that allow MCI to convert the debt into equity and take on additional debt. The cost of debt for MCI was significant, but MCI needed the money for growth. MCI’s gamble paid off and the growth outpaced the expense. The growth in the stock has enabled them to convert the old debt and take on new debt, allowing them to further grow. MCI is in an excellent strategic and financial position for growth. The market share is theirs for the taking, they have excellent debt history and financial ratios, they have $550 million in cash, and their stock price is $47 per share. The Pro Forma Balance Sheet, Sources and Uses, and Income Statement show that MCI is going to need significant capital moving forward. MCI will need to get this capital from the market, first from the sale of common stock and then from the sale of convertible debentures. Their cost of debt is calculated to be 12.46% and their required return on equity is calculated to be 16.17%. The additional debt and plant and equipment growth will allow MCI to grow from the 1983 revenue level of $1.1 billion to the expected 1990 revenue level of $10.6 billion. The changes will help MCI become a big player in the long-distance...