Mci Communications Corp. 1983

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MCI Communications Corp. 1983 1. How has MCI financed its needs in the past? Why did MCI make the financing choices it did? Initially (1972) the company tried to have a mixed financing strategy comprising of equity raising, credit lines, and privately placed debt. However, this capital structure proved to be inefficient. Due to increased risk stemming from greater than forecasted competition and legal complications, MCI technically defaulted on its payments and had to restructure its debt. The financing choices of MCI thus became dictated by the uncertainty associated with its cashflows and was thus forced to also rely on lease financing to finance its new fixed investments. Given the history of MCI’s technical default on its debt financing and the restrictions imposed from the debt covenants, the main concern had been the availability of funds irrespectively of the financing structure. Thus the company had to clear its financing structure and issue various forms of preferred equity in order to be able to generate demand for its financing. Following the above developments, as its situation started to improve in 1978, MCI used a combination of convertible preferred shares and convertible bonds, a combination of debt and equity, which both included call features to common equity. 2. How much external capital is MCI likely to need over the next several years (FY84 - FY88)? By how much could they reasonably be expected to vary? From exhibit 9A, we can see that the total CAPEX for these years for MCI would be around $8.6billion based on an assumed $20m of negative changes in the working capital, as has been the case historically. Assuming that the company does not increase its debt amounts, it would be able to generate roughly $4.3billion internally net income tax and depreciation. Therefore, the total funding needs would be in the region of $4.3b. Taking into

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