Mci Case Report Essay

1210 Words May 4th, 2015 5 Pages
Financial Strategy for Corporation

Case3
MCI Communications Corp., 1983

Estimation of external financing MCI requires until the end of 1987
MCI is the second-largest long-distance provider in the telecom industry of United States after AT&T. First of all, in this case we estimate external financing MCI requires until the end of 1987. Exhibit 9A provides the projected capital investment needs for the following year, so our group plug those data in Exhibit 3 corresponds to Funds from Operations and Use of Funds, then come up with the External Financing MCI needs from 1984 to 1987 by deducting the total Source from the total Use. By looking at each year’s needs, we noticed that the external
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We then calculate each year’s default probability on the condition that previous year did not default. Cost of financial distress can be calculated using: COFD=(Direct cost*Firm value+Indirect cost*Book value of asset) *Default Probability.
By applying 15% as the indirect cost due to MCI’s high leverage ratio, multiplies the 117.2m total shares outstanding times $47 stock price plus 500m debts, which represents the total firm value. For the direct cost part, we used 1.8% based on research for 1980s industrial average direct default cost, times the total book value of assets together with 500m debts. Then add up both direct and indirect cost and multiple by the default probability each year, which is the cost of financial distress for MCI. The last step is to discount each year’s COFD using 12.5% (rd) and totals everything up. Therefore the total present value of COFD is $151.72. Moreover, because interest is tax deductible we use formula: Tax shield= interest expense*tax rate.
Finally we discount them back to 1983 and add them up. In addition, we use the same method to calculate original cost, which is COFD. Therefore total cost equals issuing debt cost (interest expense- tax shield+ cost of financial distress) minus original cost(cost of financial distress)+PV(principal). Net proceeds=500-Total Cost =$99.33. Detailed calculation can be

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