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Mci Ocm

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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 which lead to significant delay in growth of revenue. MCI likely did not raise enough equity at the time.

In addition we observed that once operating income was positive and revenue was growing the company took on more debt and began to equalize the debt to equity. The ratio was coming down significantly over the period to end around 1.2.

Question 2: How much external capital is MCI…...

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