McI Communications Corp., 1983

Case 5: MCI Communications Corp., 1983

Due on Monday April 21 (Notice the new due date)

Questions

1. What is the likely level of MCI’s external needs over the next several years? How could they be expected to vary? Why?

2. Critique 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?

3. Based upon your analysis of the outlook for MCI and the competitive and regulatory evolution of the industry, recommend a capital structure policy (i.e., target debt ratio) for MCI and defend your proposal against plausible alternatives.

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

a) $500 million of 12 Ð'Ð..., 20-year subordinated debentures.

b) $400 million of common stocks.

c) $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).

d) $1 billion of a unit package consisting of a $1,000 7 Ð'Ð..., 10-year subordinated debenture and 18.18 warrants, each entitling the holder to purchase one share of MCI common stock for $55. The warrants would be exercisable until 1988 and are callable. The exercise price of the warrants would be payable either in cash or by surrender of the debentures valued at their principal amount.

Which, if any, of these alternatives, would you recommend that Mr. English take? Why? In broad outline, what financing steps would you recommend he take over the next several years?

Note: There is one detailed not mentioned in the case. FCC ordered city-by-city elections starting in 1984, whereby consumers were to choose their long-distance carrier. The allocation of voting consumers would determine how the rest of the market (i.e., non-voting consumers) would be allocated among the competing firms.