McI Communications Corp

MM5007 - FINANCE MANAGEMENT

ASSIGNMENT

MCI Communications Corp.

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EMBA-56

SYNDICATE 11

Ainanto Nindyo                        29116419

Aristya Anggoman G        .        29116453

Ria Noveria                        29116538

MASTER OF BUSINESS ADMINISTRATION

SCHOOL OF BUSINESS AND MANAGEMENT

INSTITUT TEKNOLOGI BANDUNG

2017

1. What message is MCI trying to send to financial markets?

MCI annouce to the market that have a undervalued stock and want to announce a buyback program.a buyback at current price will be represent a Net Present Value and its potentially to greather than other.

1. What will be the effects of issuing $2 billion of new debt and using the proceeds to repurchase shares on

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1. MCI’s shares outstanding?

• Share can be repurchased        :

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• Outstanding shares                :

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1. MCI’s book value of equity?

• BVE pre                :

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• BVE post                :

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1. the price per share of MCI stock?

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1. earnings per share?

• Bond A2                 =

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• Interest                 =

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• EPS post         =

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1. What is MCI’s current (pre-repurchase) weighted average cost of capital (WACC)?

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Rf (10yrs)  = 5,697%

Rm         = 7%

Beta         = 1

Ke = Rf + (Beta x Rm)

Ke = 5,697% + 1 (7%) = 12,7%

We = 9,602 / (3,944 + 9,602) = 70,9%

Wd = 3,444 / (3,944 + 9,602) =29,1%

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1. What would you expect to happen to MCI’s WACC if it issues $2 billion in debt and uses the proceeds to repurchase shares?

DE pre  = 3,944 / 9,602 = 0,41

Beta unlevered = 1 / 1 + (0.41 * 0.6) = 0.8

        DE post = (3,944 + 2,000) / (9,602 – 2,000) = 0.78

        Beta re-levered = 0,8 * [1 + (0.78 * 0.6)] = 1,17

Kd = 6,46% (assume bond rating decrease to BBB1)