MCI Communications Draft V11
Question 1:
MCI’s management is committed to a growth program and they are willing to sacrifice profit margins to achieve it. Consequently, the company’s external financing requirements will likely increase in years to come. Basing our projections off of the exhibits and assumptions provided in the case, we estimate MCI’s will invest approximately $3.8B over the next four years (1984-1987) of which $3.3B will need to come from external sources. As capital expenditures outstrip funds from operations, undoubtedly the company will need to seek further capital from the financial markets (Exhibit 1). However, these external financing needs could vary considerably. For one, as the antitrust settlement between AT&T and the U.S. Department of Justice mandates the breakup of AT&T by early 1984, both growth opportunities and cost uncertainties simultaneously increase for MCI Communications. MCI could certainly gain by having equal quality of access to all local telephone companies, but to what extent is difficult to assess. By FY1990, MCI market share is forecasted to hit 20%, however, this number is contingent upon other competitors in the market and the market itself as it adapts to the shock of competition. If market share increases more dramatically or more rapidly than predicted, MCI could have increased external financing needs in order to support additional capacity requirements. On the other hand, if future market share is less than forecasted, capital expenditures could decrease providing a reduction to the external financing requirements. On another note, MCI’s access charges are forecasted to increase by 80% in 1984, but are expected to taper off in FY1990. As these numbers are just estimates, any deviation could drastically impact MCI’s profitability and consequently their outside capital requirements. Additionally, it is forecasted that legislation in Congress will forbid MCI to pass these direct access charges onto households and businesses,
MCI’s management is committed to a growth program and they are willing to sacrifice profit margins to achieve it. Consequently, the company’s external financing requirements will likely increase in years to come. Basing our projections off of the exhibits and assumptions provided in the case, we estimate MCI’s will invest approximately $3.8B over the next four years (1984-1987) of which $3.3B will need to come from external sources. As capital expenditures outstrip funds from operations, undoubtedly the company will need to seek further capital from the financial markets (Exhibit 1). However, these external financing needs could vary considerably. For one, as the antitrust settlement between AT&T and the U.S. Department of Justice mandates the breakup of AT&T by early 1984, both growth opportunities and cost uncertainties simultaneously increase for MCI Communications. MCI could certainly gain by having equal quality of access to all local telephone companies, but to what extent is difficult to assess. By FY1990, MCI market share is forecasted to hit 20%, however, this number is contingent upon other competitors in the market and the market itself as it adapts to the shock of competition. If market share increases more dramatically or more rapidly than predicted, MCI could have increased external financing needs in order to support additional capacity requirements. On the other hand, if future market share is less than forecasted, capital expenditures could decrease providing a reduction to the external financing requirements. On another note, MCI’s access charges are forecasted to increase by 80% in 1984, but are expected to taper off in FY1990. As these numbers are just estimates, any deviation could drastically impact MCI’s profitability and consequently their outside capital requirements. Additionally, it is forecasted that legislation in Congress will forbid MCI to pass these direct access charges onto households and businesses,