...MCI Communications Corp. BACKGROUND MCI Communications Corp., a long distance telecommunications company, had been a sluggish performer in a buoyant market, and the management sensed a growing restlessness on the part of shareholders. To enhance the shareholders’ value, the company planned to repurchase some of its outstanding common stock. To guide the management in its decision, the company sought the advice of Lynch Investments in establishing a program to repurchase some of its outstanding common stocks. This leads to Katzu Mizuno, an associate of Lynch Investments, to investigate what source of fund is appropriate for the repurchase program and the possible effect of such action in the company. CASE ANALYSIS This case analysis aims to answer the following problem: How should the company finance its plan to repurchase its outstanding common stock in order to enhance its shareholder value? The company will be less flexible if it would have a debt-equity ratio of 72%. But since the said D/E ratio would “still be moderate with respect to the industry”, MCI’s bond rating won’t go below a medium grade of BBB. MCI needs to unlevered and then re-lever the target company’s equity beta. Unlevering the target’s equity beta yields an estimated beta comparable to the other major competitors which have different debt structure (see Exhibit B). Thus, re-levering this equity beta to reflect MCI’s target capital structure yields the appropriate risk for MCI to use in estimating a cost...
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...Question 1: How effectively has MCI financed its needs in the past? In looking through case data from Pg. 2 (68 of course-pack), Exhibit 2 and Exhibit 9A, we see that MCI has gone through two stages: 1. Startup stage from FY1972 through 1977, where the firm generated negative OI 2. Growth stage from FY1978 onwards where the firm started generating positive OI The financing for the startup phase was performed predominantly through common stock as expected, followed by debt financing. During this stage, MCI had grossly under-estimated its cash requirements to support its build-out strategy which had led to the technical default. This had forced the firm to raise equity financing in an emergency mode, allowing it to survive. During the growth stage (triggered by the success of Execunet), the need to obtain funds to support operations and capital investment dominated the firm’s financial policy. Wayne English’s perception was that raising funds by using common stock would cause dilution, and given the fact that this is the most expensive way of raising funds in the long-run, a choice was made to use convertible preferred stock. This is definitely less expensive compared to equity, and given the fact that the dividend was 85% tax-deductible to corporate purchasers without a significant loss of tax benefits; it was a good method to finance the operations. One possible reason for a negative equity was that the company did not expect the uncooperative actions from AT&T...
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...MCI Communications Corp., 1983 En abril de 1983, Wayne English, director financiero de MCI Communications Corp., se enfrentaba al problema de establecer una política financiera en un ambiente caracterizado por una gran demanda potencial de fondos externos y una gran incertidumbre en relación con el futuro de MCI. Esta compañía, que ofrecía servicios de telecomunicación a larga distancia en competencia con AT&T, había visto crecer sus ingresos de casi nulos en el año fiscal de 1974 (terminado el 31 de marzo de 1974), a más de 1.000 millones de dólares en 1983. Durante este período, MCI pasó de experimentar una pérdida de 38,7 millones de dólares en 1975, a obtener unos beneficios de 170,8 millones de dólares en 1983. Sólo en esos dos últimos años, el precio de las acciones se había multiplicado por cinco o más. Sin embargo, el acuerdo antimonopolio establecido en 1982 entre AT&T y el Departamento de Justicia de Estados Unidos había alterado de modo significativo las perspectivas económicas de MCI. El acuerdo, por el cual debía desmembrarse AT&T a principios de 1984, afectaría a MCI de dos modos muy importantes. Por una parte, ofrecía la oportunidad de aumentar enormemente el crecimiento, dado que AT&T tendría que competir por primera vez en los mismos términos de calidad de servicio con MCI. Por otra parte, el acuerdo creaba nuevas incertidumbres, ya que prometía eliminar ciertas ventajas de coste de MCI y aumentar la flexibilidad competitiva de AT&T. Sin embargo...
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...required return on debt (r D ) and the required return on equity (r E ). To do this, an equity Beta for MCI is needed. This was done by comparing MCI returns to S&P 500 returns for a p eriod of 3 years and a period of 5 years. The Beta s were vastly different and so the Beta for the 3 yea r period was used so that the more current correlat ion could be used. MCI has been dramatically changing over the past 3 years and it would be more appropriate to use the more recent equity beta valu e. The equity beta value is 1.822 (Appendix 4). After calculating the beta, the next step is to ca lculate an Expected return on the market from equity investors. To do this, data from two differ ent S&P 500 data sets was used and the monthly returns were calculated. The average monthly retur n was near 1.00%, giving a compounded yearly 8 return of around 12.75%. This data is tabulated in Appendix 5 and Appendix 6. The data sets extend from 1980 to March 1983, similar to the beta calcul ation. The next step involves determining a risk-free rat e of return. This was calculated using the average return on the 13-week t-bill for the same 1 980 to 1983 period. The corresponding data is shown in Appendix 7 and the calculated risk-free ra te is 11.72%. Exhibit 7 from the case was used to calculate the required return on debt for MCI. The average return of the MCI bonds from 1980 to 1983 was taken and calculated to be r D = 12.46%. This is very high considering the...
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...discovered, such as MCI Communications Corporation (MCI). Financial scandals can be minimized by the use of effective internal controls. According to Chao and Foote, effective internal controls reasonably prevent material misstatements in financial reporting and fraud while weak internal controls have the opposite effect (2012). Extensive research about the MCI’s financial scandal has provided proof that Chao and Foote’s analogy of internal controls is correct. Ultimately, the problems MCI had were caused by a weakness in internal controls, which causes MCI to be a prime example of how weak internal controls can be disastrous and lead to the bankruptcy of a company. The Situation That Led to MCI’s Downfall MCI Communications Corporation (MCI) was a communication company that primarily dealt with resellers, which means MCI would sell or lease time to other communication carriers who in turn resold the time to other businesses and consumers. According to Lyon and Tocco (2007), MCI’s revenue grew from about $240 million to about $650 million a month in account receivables. In addition, the growth in revenue caused the bad debt percentage to increase significantly in 1995 along with a significant increase in accounts receivable that exceeded 90 days. However, MCI appeared to be determined to keep their bad debt percentage to two percent and account receivables exceeding 90 days between five and seven percent regardless of the company’s recent growth. In order for MCI to keep the percentage...
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...accounting ethical breach? 3. How was WorldCom caught and how they failed to be ethical? 4. What accounts were impacted and the resulting impact on operations? 5. What measures could have been taken to prevent this breach? The first thing that we will do is to describe how WorldCom came to be one the biggest companies in the telecommunications industry. WorldCom began in 1983 in Clinton, Mississippi as a long distance company called Long Distance Discount Services. As a result of several mergers that began in 1985 after the board elected Bernie Ebbers as the company CEO, the company grew by leaps and bounds. On November 4, 1997, WorldCom and MCI Communications announced their $37 billion merger to form MCI WorldCom, making it the largest corporate merger of U.S. history. On October 5, 1999, Sprint Corporation and MCI WorldCom announced a $129 billion merger agreement between the two companies. This deal did not finalize because of opposition from the U.S. Department of Justice and the European Union because of concerns of it creating a monopoly. According to the Library of Economics and Liberty, a monopoly is defined as an...
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...ACC460 –Auditing Video Case Fraud and Tone at the Top - Video Case Questions This video is an informative video made for accounting students and employees that outlines the danger of corruption and fraud in the workplace. The majority of the video is an interview with Walt Pavlo of MCI Worldcom. He explains his case and the steps that lead him to take the actions that landed him in prison. While he is telling his story two gentalmen describe how Walt’s story relates to the world of auditing as a whole and what steps a company and auditors need to take to avoid cases of fraud. 1. What were the three major fraud factors that led Walt Pavlo to commit fraud at MCI Worldcom? * Meeting Analysts’ Expectations * Compensation and Incentives * Pressure to reach goals 2. List five reasons employees don’t report unethical conduct. * No Corrective Action * Confidentiality of Reports * Retaliation by Superiors * Retaliation by Co-workers * Unsure whom to Contact 3. List the eight elements discussed in the video that lead to a negative work environment. * Not Rewarding Appropriate Behavior * Negative Feedback * Perceived Organizational Inequalities * Autocratic management * Low organizational loyalty * Unreasonable Goals and Expectations * Compensation * Promotional Opportunities * Organizational Responsibilities 4. List the seven steps management can take to help prevent fraud. *...
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...MCI Communications Corporation FOUNDED: 1968 Contact Information: HEADQUARTERS: 1801 Pennsylvania Ave. Washington, DC 20006 PHONE: (202)872-1600 FAX: (202)887-3140 URL: http://www.mci.com OVERVIEW MCI is the second-largest long-distance provider in the United States after AT&T. It is a leader and innovator in the telecommunications industry. MCI was instrumental in forging an opening in that industry for companies to compete with AT&T. It continued in the late 1990s to lead all others except for AT&T, which had held an industrywide monopoly until the 1980s. The company, located just a few blocks from the White House, has offices in 300 locations around the world, and competes in a wide variety of communication service markets. In 1997, the global long-distance company World-Com Inc. made a $30-billion bid to buy MCI. GTE made a $28 billion offer. After some negotiation, MCI agreed to a $37-billion purchase by WorldCom. The merger was announced November 10, 1997 and the new company will be named MCI WorldCom. COMPANY FINANCES Upon announcing the merger of MCI and World-Com Inc., the combined firms projected over $30 billion in revenues for 1998. In 1997 MCI had net income of $209 million on revenue of $19.65 billion, as compared to 1996 when net income was __BODY__.20 billion on revenue of $18.49 billion. This was a considerable increase over 1995 income of $548 million on $15.26 billion in revenues. Earnings per share of stock rose from $.80 in 1995...
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...of WorldCom not only broke but with a personal net worth as a negative nine-digit number.2 No palace in a gated community, no stable of racehorses or multi-million dollar yacht to show for the telecommunications giant he created. Only debts and red ink--results some consider inevitable given his unflagging enthusiasm and entrepreneurial flair. There is no question that he did some pretty bad stuff, but he really wasn't like the corporate villains of his day: Andy Fastow of Enron, Dennis Koslowski of Tyco, or Gary Winnick of Global Crossing.3 Personally, Bernie is a hard guy not to like. In 1998 when Bernie was in the midst of acquiring the telecommunications firm MCI, Reverend Jesse Jackson, speaking at an all-black college near WorldCom's Mississippi headquarters, asked how Ebbers could afford $35 billion for MCI but hadn't donated funds to local black students. Businessman LeRoy Walker Jr., was in the audience at Jackson's speech, and afterwards set him straight. Ebbers had given over $1 million plus loads of information technology to that black college. "Bernie Ebbers," Walker reportedly told Jackson, "is my mentor."4 Rev. Jackson was won over, but who wouldn't be by this erstwhile milkman and bar bouncer who serves meals to the homeless at Frank's Famous Biscuits in downtown Jackson, Mississippi, and wears jeans, cowboy boots, and a funky...
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...WorldCom the Rise and Fall WorldCom began in 1983 during the breakup of AT&T, which enabled competitors to start selling long distance telephone service to individuals and business customers. A group of investors from Hattiesburg, Mississippi decided to start a communications company called Long Distance Discount Services (LDDS). The company lead by Bill Fields leased a local Bell System Wide-Area Telecommunications Service (WATS) line and resold time on the line to businesses. The sophisticated long distance technology was designed to handle a high volume of calls. The lines were leased at a fixed rate so the idea was that the more customers a company could obtain the lower cost for the company. Fields was able to sign 200 customers, however during this time the telecommunications industry was very competitive and when Bell starting raising the fixed lease rate on the lines LDDS was in trouble. By the end of the first quarter 1985 the company was losing approximately $25,000 a month. When Fields attempt to sell off the company was unsuccessful, one of the initial investors by the name of Bernard Ebbers agreed to become president and chief executive officer for LDDS, who at this time was 1.5 million dollars in debt. Ebbers, a Canadian, was a successful business owner in the hotel business. He came to the United States on a basketball scholarship to Mississippi College. Upon graduation Ebbers saw an opportunity in the motel industry and was able to borrow enough...
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...Wor9 - 1 04 - 0 71 R EV: JU LY 2 6 , 2 00 4 RO BERT S. KAPLAN D A VI D KIR O N Accounting Fraud at WorldCom WorldCom could not have failed as a result of the actions of a limited number of individuals. Rather, there was a broad breakdown of the system of internal controls, corporate governance and individual responsibility, all of which worked together to create a culture in which few persons took responsibility until it was too late . — Richard Thornburgh, former U.S. attorney general1 On July 21, 2002, WorldCom Group, a telecommunications company with more than $30 billion in revenues, $104 billion in assets, and 60,000 employees, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Between 1999 and 2002, WorldCom had overstated its pretax income by at least $7 billion; a deliberate miscalculation that was, at the time, the largest in history. The company subsequently wrote down about $82 billion (more than 75%) of its reported assets.2 WorldCom’s stock, once valued at $180 billion, became nearly worthless. Seventeen thousand employees lost their jobs; many left the company with worthless retirement accounts. The company’s bankruptcy also jeopardized service to WorldCom’s 20 million retail customers and on government contracts affecting 80 million Social Security beneficiaries, air traffic control for the Federal Aviation Association, network management for the Department of Defense and long-distance services for both houses of Congress and the...
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...day. WorldCom achieved its position as a significant player in the telecommunications industry through the successful completion of 65 acquisitions. Between 1991 and 1997, WorldCom spent almost $60 billion in the acquisition of many of these companies and accumulated $41 billion in debt. Two of these acquisitions were particularly significant. The MFS Communications acquisition enabled WorldCom to obtain UUNet, a major supplier of Internet services to business, and MCI Communications gave WorldCom one of the largest providers of business and consumer telephone service. By 1997, WorldCom's stock had risen from pennies per share to over $60 a share. Through what appeared to be a prescient and successful business strategy at the height of the Internet boom, WorldCom became a darling of Wall Street. In the heady days of the technology bubble Wall Street took notice of WorldCom and its then visionary CEO, Bernie Ebbers (Moberg, Romar, 2003). Acquisition after acquisition led to started to warrant a suspicion into the dealings of the WorldCom organization. The company hit rock bottom when it declared bankruptcy after its merger with MCI. This is where the proverbial ball of yarn starts to come unraveled for the company. The company manipulated the account books and reported false gains and increases to continue to make it appear as a hot item on the stock market. In actuality the...
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...Mark Willis BUS 508 – Contemporary Bus November 15, 2013 Determine the most important five skills that a forensic accountant needs to possess and evaluate the need for each skill. Be sure to include discussion regarding the relationship between the skill and its application to business operations. As the annual price tag for fraud at American business soars to nearly $1 trillion, the demand for Certified Public Accountants that provide forensic accounting services has increased exponentially- a spike that appears in no danger of waning over the next several years. (Carlino, 2010) With the demand for forensic accounting services increasing, it is very beneficial for prospective employers and employees to know what skills are needed to fulfill the duties of this very important occupation in today’s society. “Forensic accounting encompasses collecting, analyzing, and evaluating evidence, and the interpreting and communicating the findings in courts, boardrooms or other venues.” (Carlino, 2010) There are numerous skills needed for these positions but five skills are vital in becoming am effective forensic accountant. The most essential skill needed to become an effective forensic accountant is included in the description of the position. One has to be very analytical in their profession in order to become efficient and effective. Being a problem solver in any business is a trait that no business wants lacking from their employees, but in the field of finance and...
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...collapse of WorldCom not only broke but with a personal net worth as a negative nine-digit number.2 No palace in a gated community, no stable of racehorses or multi-million dollar yacht to show for the telecommunications giant he created; only debts and red ink--results some consider inevitable given his unflagging enthusiasm and entrepreneurial flair. There is no question that he did some pretty bad stuff, but he really wasn't like the corporate villains of his day: Andy Fastow of Enron, Dennis Koslowski of Tyco, or Gary Winnick of Global Crossing.3 Personally, Bernie is a hard guy not to like. In 1998 when Bernie was in the midst of acquiring the telecommunications firm MCI, Reverend Jesse Jackson, speaking at an all-black college near WorldCom's Mississippi headquarters, asked how Ebbers could afford $35 billion for MCI but hadn't donated funds to local black students. Businessman LeRoy Walker Jr., was in the audience at Jackson's speech, and afterwards...
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...December 2005, two years after this case was written, the telecommunications industry consolidated further. Verizon Communications acquired MCI/WorldCom and SBC Communications acquired AT&T Corporation, which had been in business since the 19th Century. The acquisition of MCI/WorldCom was the direct result of the behavior of WorldCom's senior managers as documented above. While it can be argued that the demise of AT&T Corp. was not wholly attributable to WorldCom's behavior, AT&T Corp.'s decimation certainly was facilitated by the events surrounding WorldCom, since WorldCom was the benchmark long distance telephone and Internet communications service provider. Indeed, the ripple effect of WorldCom's demise goes far beyond one company and several senior managers. It had a profound effect on an entire industry. This postscript will update the WorldCom story by focusing on what happened to the company after it declared bankruptcy and before it was acquired by Verizon. The postscript also will relate subsequent important events in the telecommunications industry, the effect of WorldCom's problems on its competitors and labor market, and the impact WorldCom had on the lives of the key players associated with the fraud and its exposure. From Benchmark to Bankrupt Between July 2002 when WorldCom declared bankruptcy and April 2004 when it emerged from bankruptcy as MCI, company officials worked feverishly to restate the financials and reorganize the company. The new CEO Michael...
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