MCI Case
Homework #5
1) MCI initially financed its needs through equity issuance. This was done because MCI’s source of revenue was insecure in its infancy, and this allowed them to raise capital without being tied down by excessive debt repayments further down the road.
To continue raising capital after MCI began posting early profits (particularly to repay short-term bank debt), the company issued convertible preferred stock. This preferred stock was able to attract capital due to its dividend paying attributes, but prevented the dilution of common stock. The convertibility allowed MCI to retire these preferred shares into common shares when the preferred shares appreciated significantly, allowing the company to forgo expensive dividend payments.
As the company continued to mature and show that it was capable of remaining stable and profitable, it was able to achieve enough creditworthiness to raise capital through debenture issuances. At this point, it was also able to generate enough growth in profitability to also service the repayment of this corporate debt for the foreseeable future.
2) External financing can be defined as the difference between total capital expenditures and EBIDTA. According to MCI’s baseline forecast, the amount of external financing needed for the years between 1984 and 1988 is:
[figures in millions] FY1984 FY1985 FY1986 FY1987 FY1988 TOTAL
Total capital expenditures 890 1,467 1,931 2,760 1,457
After-tax net income 210 235 371 588 731
Depreciation 173 272 412 601 749
Required external financing 507 960 1,148 1571 -23 4,163
This shows that we expect to need approximately $4.16 billion in external financing between 1984 and 1988 (although capital expenditures actually tapers in 1988 and can be covered by EBITDA).
These forecasts may be somewhat unreliable, however, as the EBITDA figure is heavily affected by whether AT&T decides to compete on pricing due to relaxed FCC legislation. If this occurs, MCI may be forced to
1) MCI initially financed its needs through equity issuance. This was done because MCI’s source of revenue was insecure in its infancy, and this allowed them to raise capital without being tied down by excessive debt repayments further down the road.
To continue raising capital after MCI began posting early profits (particularly to repay short-term bank debt), the company issued convertible preferred stock. This preferred stock was able to attract capital due to its dividend paying attributes, but prevented the dilution of common stock. The convertibility allowed MCI to retire these preferred shares into common shares when the preferred shares appreciated significantly, allowing the company to forgo expensive dividend payments.
As the company continued to mature and show that it was capable of remaining stable and profitable, it was able to achieve enough creditworthiness to raise capital through debenture issuances. At this point, it was also able to generate enough growth in profitability to also service the repayment of this corporate debt for the foreseeable future.
2) External financing can be defined as the difference between total capital expenditures and EBIDTA. According to MCI’s baseline forecast, the amount of external financing needed for the years between 1984 and 1988 is:
[figures in millions] FY1984 FY1985 FY1986 FY1987 FY1988 TOTAL
Total capital expenditures 890 1,467 1,931 2,760 1,457
After-tax net income 210 235 371 588 731
Depreciation 173 272 412 601 749
Required external financing 507 960 1,148 1571 -23 4,163
This shows that we expect to need approximately $4.16 billion in external financing between 1984 and 1988 (although capital expenditures actually tapers in 1988 and can be covered by EBITDA).
These forecasts may be somewhat unreliable, however, as the EBITDA figure is heavily affected by whether AT&T decides to compete on pricing due to relaxed FCC legislation. If this occurs, MCI may be forced to