Bula Mines

Bula Mines

MCI was organized in August 1968 as the Federal Communications Commission (FCC) appeared willing to allow increased competition with AT&T (MCI's biggest competitor) in the long-distance market.

Until 1974 MCI had to rely on AT&T facilities to carry calls from its subscribers to MCI transmission centers in each metropolitan area. Because AT&T had successfully resisted providing a full range of these interconnection services, MCI was unable to generate significant subscriber revenues.

However, from May 1974 onwards, the FCC ordered AT&T to provide MCI with the full range of interconnection facilities which made MCI resume the construction of its network.

In 1976, MCI reached a turning point after years of relatively low revenues and losses. One of the biggest reasons for this turning point was the fact that MCI's "Execunet" services, introduced in 1974, began to yield substantial revenues.

In 1978 MCI started to yield profits, which rapidly grew up to a level of $ 170.8 M (net after-tax earnings) in 1983. Revenues increased from less than $ 10 M in 1974 to a level of over $ 1.1 Billion in 1983.

However, in 1983 Mr. Wayne English, CFO of MCI, faced the problem of setting financial policy in an environment characterized by a large potential demand for external funding and great uncertainty concerning MCI's future. This uncertainty was mainly caused by an antitrust settlement between AT&T and the Justice Department in January 1982. This settlement would separate AT&T from its local operating subsidiaries and if forced AT&T to compete on equal quality-of-service terms with MCI for the first time. Although this offered opportunities for big growth of MCI, it also led to uncertainty since some MCI costs advantages might be eliminated and AT&T's competitive flexibility increased.

The next two paragraphs will subsequently handle the following two questions:

1. Are the various past financing decisions made by MCI in table 6 consistent with its changing business conditions?

2. Assume that Mr. English, the MCI CFO, has the following financing alternatives available to him as of April, 1983:

2.1 $ 500 M of 12.5%, 20 year subordinated debenture;

2.2 $ 400 M of common stock;

2.3 $ 600 M of 7.625%, 20 year convertible debenture with conversion price of $54/share. The debenture would be callable after 5 years;

2.4 $ 600 M of a unit package consisting of $ 1000 of 7.5%, 20 year subordinated debenture and 18.18 warrants with exercise price of $55. The warrants would be callable after 3 years and exercisable until 1988.