Essay Preview: Mci
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1. a) General Environment and investment needs
The general environment that faced MCI at the time of this case surrounds the telecommunication industry. MCIs major competitor was AT&T who had basically a monopoly on the industry at the time. MCI was a young upstart company that was always in search of money. The first few years MCI sold millions of dollars of stock, exhausted the lines of credit they were able to get, and tapped private investors. They also went up against the giant, AT&T to gain full access to the interconnective services. While all this was going on, MCI stock price went below $1, had a negative net worth of $27.5 million, and an operating deficit of $87.3 million. MCI sold more common stock that enabled them to continue to do business.
MCI experienced a significant turn in 1976 when Execunet began producing considerable revenues. It was the first time MCI was able to start paying the interest on their loans and made their first $100,000 in profit. Even during this small success, the FCC was able to restrict who MCI could sell Execunet service to, but the move did not deter MCI in their growth efforts.
By 1983, MCI was on, what appeared to be, the road to success. The only thing that still stood in the way was the lack of steady investment capital, even though revenue was up to $1,073 million and net income from operation was $170.8 million. Here are a few other pieces of interesting information about MCI at this point. When compared to like companies, except for GTE, MCI is still relying heavily on debt to finance its assets with a debt ratio of 55%. In addition, MCIs revenue, net income, and assets where also significantly lower than the rest of the telecommunication industry which demonstrates the risk MCI was willing to take by investing in debt. In addition, MCI stock and bonds have always been in the “Not Rated” category. Their return on equity (32.4) shows that MCI was generating a profit with shareholders money. The return on sales and assets also show that MCI was becoming more efficient and earning more money on less of an investment. Of course the stockholders did not benefit from MCIs growing efficiency because no dividends have ever been paid out. To keep this momentum going they are going to have to refocus their attention to reducing debt and increasing revenues.
2. Recommend a capital structure and explain reasoning.
Since MCI is just beginning to show a profit it may be time to look just how much more risk they can take on and still continue to be a viable company. Before MCI can develop a capital structure, it needs to figure out where they want the business go and create the capital structure to make that happen.
It seems to me that if MCI continues to take on debt the way they are they will reach a point where they will not be able to pay the debt off. Even with the tax advantages that debt carries, MCI should consider minimizing their debt and financing their growth and capital through the sale of stocks, bonds, or other securities.
Right now MCI debt ratio is very high at 55%. This high rate of debt will significantly reduce the companys flexibility to make investments like capital expenditures, acquisitions, and, research and development, and sales and marketing. By having such a high amount of debt, MCI is driving up the costs of financing by having to pay high interest rates on money they borrowed. They need to pay down their debt, considering the fact that MCIs chef