Butler Lumber

MCI Communications Corp 

1. What is the likely level of MCI's external cash needs over the next several years?  (As a proxy for operating cash flow, refer to Exhibit 9A and add together lines 10 and 16.  As an estimate of gross cash requirements, add together line 15 and line 18.  Subtracting operating cash flow from gross cash requirements will give you an estimate of the amount of external capital needed to be raised each year.)

2.  Do you think the estimates you made in #1 above are likely to be very accurate?  By how much could they reasonably be expected to vary? Why? 

3. Review MCI's past financial strategy, giving attention to the types of securities on which it has relied. Why did MCI finance itself in the manner it did? 

4. Based upon your analysis of the outlook for MCI and the competitive and regulatory evolution of the industry, recommend a capital structure policy (the long term goal for the percentage of debt and the percentage of equity) for MCI. 

5 Assume that Mr. English, the MCI chief financial officer, has the following financial alternatives available to him as of April 1983:

            a.  $500 million of 12 1/2%, 20 year subordinated debentures.

            b.  $400 million of common stock

            c1 $600 million of 7 5/8%, 20 year convertible subordinated debentures with conversion price of $54 per share (i.e. each $1,000 bond would be converted into 18.52 common shares).

            c2 $1 billion of a unit package consisting of a $1,000 7 1/2%, 10-year subordinated debenture and 18.18 warrants, each entitling the holder to purchase one share of MCE common stock for $55. The warrants would be exercisable until 1988. 

Which of these alternatives would you recommend that Mr. English take? Why? (Choose one or the other. No compromises.)

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