What Have Been McI Sources of Funds in the Past?
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What have been MCI sources of funds in the past (1972-1983)? Whats your opinion?
Around 1972 MCI issued equity and later on time when the company started going well they issued debentures and convertible debentures. The main raison to do that is because equity cost use to be higher. First of all they issued debentures but they realise that the convertible debentures had lower cost of capital and they started issuing them. Due to the high growth of the company the stock price rise a lot during the time and therefore they converted the convertible debentures to common stock increasing its equity. After that they issued convertible bonds that provided a cost effective way for MCI Communications to finance the capital investments they had during the high growth of the company.
As the stock prices rose over the time MCI forced the conversion to eliminate interest payments. They issue convertible debt and as stock prices raised a lot they reduce the leverage converting it into stocks.
As the company was growing at good levels the stock price was suppose to rise. That way of financing in my opinion was a good way to finance the company due to the problems they would find in the banks and in the bonds markets. As the investors trust in the growth of the company they accepted a low rate coupon because of the expected an appreciation if the MCI stock price goes up.
Please, calculate the funding gap for the next years through a cash flow statement?
Due to the higher competitiveness of the market due to the new regulations the company will have to pay higher access charges increasing the needs of external financing. If the company wants to increase its market share they will have to invest huge capitals in its network.
What is your opinion about MCI current capital structure? What should be MCI capital structure in the future?
In 1983 the telecom industry was affected by several changes in regulation. As we read in the case the main company has been obliged to divide itself into smaller companies and to get a competitive market the costs were being established at the same level for everyone. This is a period of great opportunity of getting higher market share for MCI. They had a capital structure of around 55% of leverage and the financing challenges MCI should face during the next years are:
If they issue equity the shareholders value will be diluted and the cost of equity will raise a lot.
As they had a high leverage of around 60% disable the possibility of issuing bonds and also because they dont have previous track in the market.
They were issuing convertible debt offerings to raise capital and infuse equity forcing the conversion.
In my opinion the best option they have is to continue with the