MCI is going to need significant cash in order to undertake the capital investment plans that will allow it to achieve the 20% market share that it desires. The projections call for capital expenditures ranging from $890 mln in 1984 to $2.76 bln in 1987. With an existing cash position of $542 mln, MCI can cover its capital expenditures requirements for only a year (1984). Thereafter, the financing needs range from $732 mln in 1985 to $1.43 bln in 1987, assuming that access charges do not exceed 29.5% of sales in 1987 before tapering off to about 26.5% of sales in 1990 (Appendix xxx).
In general, MCI’s funding needs will be very volatile over the next several years due to: 1. uncertain economic environment
2. uncertain competitive landscape due to AT&T antitrust settlement 3. expected volatility in terms of revenue growth; MCI revenue is expected to increase more rapidly immediately following the advent of “equal access” but eventually slow down 4. growth program may require sacrifice from profit margins 5. expected volatility in terms of access charges, which is expected to double between 1983 and 1985 and continued uncertainty within this area due to AT&T policies and government regulations 6. volatility in operating margins due to dual pressure of higher access charges and increased competition from a newly revamped AT&T 7. uncertainty regarding cash and cash equivalents
8. tax as a percentage of net income, which is subject to change as growth and investment slow in later years reduce available credits 9. incremental investment factor is also subject to change as technology advances 10. older equipment will eventually be replaced, leading to higher CAPEX
MCI does not generate that much cash, and so it needs to generate additional capital.
Prior to 1978, MCI’s financial strategy was merely to fund its continuing operations and to expand its capacity in its existing markets. After the...