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*…show more content…*

This better capital structure would be making it easier for MCI to raise capital in the future.

Analysis of outlook for MCI

MCI would be better to keep its capital structure of 55% debt. The cost of equity is high because raising more equity will dilute the value for existing shareholders. Due to the fact that MCI has a high leverage, it is not feasible to issue debt. Additionally, MCI has exhausted the line of credit from the banks and used convertible debentures frequently. MCI belongs to a competitive and regulatory industry. The high leverage will limit its potential to grow. In exhibit 8, MCI does not have a bond rating. The convertible bond allowed the company to raise capital and convert to equity later. The interest coverage ratio of AT&T is 3.6X whereas that of MCI is 4.2X. After increasing the market share, the company can obtain a bond rating by decreasing its financial leverage.

Three different financing alternatives a. Debt issue:

If MCI wants to issue $500 million of 20-year subordinated debentures, we first calculate the interest payment, which is $62.5. The total interest payment would be $116.6 by adding up the previous net interest, so we can calculate the interest coverage ratio by dividing the operating income in 1983 by the total interest payment, which is 2.53. Then we look up the

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

This better capital structure would be making it easier for MCI to raise capital in the future.

Analysis of outlook for MCI

MCI would be better to keep its capital structure of 55% debt. The cost of equity is high because raising more equity will dilute the value for existing shareholders. Due to the fact that MCI has a high leverage, it is not feasible to issue debt. Additionally, MCI has exhausted the line of credit from the banks and used convertible debentures frequently. MCI belongs to a competitive and regulatory industry. The high leverage will limit its potential to grow. In exhibit 8, MCI does not have a bond rating. The convertible bond allowed the company to raise capital and convert to equity later. The interest coverage ratio of AT&T is 3.6X whereas that of MCI is 4.2X. After increasing the market share, the company can obtain a bond rating by decreasing its financial leverage.

Three different financing alternatives a. Debt issue:

If MCI wants to issue $500 million of 20-year subordinated debentures, we first calculate the interest payment, which is $62.5. The total interest payment would be $116.6 by adding up the previous net interest, so we can calculate the interest coverage ratio by dividing the operating income in 1983 by the total interest payment, which is 2.53. Then we look up the

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