cguMCIcase

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MCI Communications Corp.1983

Nathan Lyons-Smith

12/14/2009


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Contents

Executive Summary ....................................................................................................................................... 3

Introduction .................................................................................................................................................. 4

Background ................................................................................................................................................... 4

Before the First Antitrust Suit (Before May 1974) .................................................................................... 4

Before the Second Antitrust Suit (June 1974 January 1982) ................................................................. 4

After the Second Antitrust Suit (February 1982 Today) ........................................................................ 4

SWOT Analysis Pre AT&T Breakup ............................................................................................................. 5

SWOT Analysis Post AT&T Breakup ........................................................................................................... 5

MCIs Past Financial Strategy ........................................................................................................................ 6

MCI Financial Analysis for Growth ................................................................................................................ 7

Calculation of Cost of Debt and Cost of Equity ......................................................................................... 7

Calculation of MCIs Future Financial Needs ............................................................................................ 8

Conclusion ..................................................................................................................................................... 9

Appendix 1 Pre AT&T Breakup ................................................................................................................. 10

Appendix 2 Post AT&T Breakup ............................................................................................................... 11

Appendix 3 Chronology of Significant Events .......................................................................................... 12

Appendix 4 MCI Beta Calculation ............................................................................................................. 13

Appendix 5 S&P 500 Data Set 1 (1980-1983) ........................................................................................... 14

Appendix 6 S&P 500 Data Set 2 (1980-1983) ........................................................................................... 15

Appendix 7 Risk Free Rate T-Bill Average 1980-1983 ........................................................................... 16

Appendix 8 Calculation of MCIs rD .......................................................................................................... 17

Appendix 9 Calculation of MCI Required rE.............................................................................................. 17

Appendix 10 Table of Rates...................................................................................................................... 17

Appendix 11 MCI Pro Forma Balance Sheet ............................................................................................ 18

Appendix 12 MCI Pro Forma Sources and Uses ....................................................................................... 19

Appendix 13 MCI Pro Forma Income Statement ..................................................................................... 19

Appendix 14 MCI Proposed Financial Moves ........................................................................................... 20

Appendix 15 Financial Ratio Analysis ($ billions) ..................................................................................... 20


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Executive SummaryMCI has been providing long distance telecommunication services for several years. The

company has seen its revenue grow from almost nothing in FY1974, to more than $1 billion in FY1983.

The company has had problems from AT&T unfairly using its monopoly and from the FCC passing

regulation against MCIs services. Each time this has happened, the courts have ruled in MCIs favor,

and MCI has continued to grow. Recently, the FCC has broken up the AT&T monopoly and forced it to

compete on fairer terms. This has given MCI the opportunity to steal a large chunk of market share

from AT&T, but MCI would need to obtain funds and grow in order to do this.

The company has raised capital in the past by issuing convertible preferred stock and

debentures that allow MCI to convert the debt into equity and take on additional debt. The cost of debt

for MCI was significant, but MCI needed the money for growth. MCIs gamble paid off and the growth

outpaced the expense. The growth in the stock has enabled them to convert the old debt and take on

new debt, allowing them to further grow.

MCI is in an excellent strategic and financial position for growth. The market share is theirs for

the taking, they have excellent debt history and financial ratios, they have $550 million in cash, and their

stock price is $47 per share. The Pro Forma Balance Sheet, Sources and Uses, and Income Statement

show that MCI is going to need significant capital moving forward. MCI will need to get this capital from

the market, first from the sale of common stock and then from the sale of convertible debentures. Their

cost of debt is calculated to be 12.46% and their required return on equity is calculated to be 16.17%.

The additional debt and plant and equipment growth will allow MCI to grow from the 1983

revenue level of $1.1 billion to the expected 1990 revenue level of $10.6 billion. The changes will help

MCI become a big player in the long-distance telecommunications industry and will provide a strong

base for future operations of the company.


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IntroductionMCI needs to determine what its financial policy should be for the next few years so that it can

capitalize on its market position and grow into a hugely profitable company. MCI needs to determine its

strategic position, financial structure, and capital needs necessary for its potential growth.

BackgroundMCI has been providing long distance telecommunication services for years. The company has

revenue growth from almost nothing in FY1974, to more than $1 billion in FY1983. In the last two years,

MCIs stock price has increased five-fold. MCI operates in an industry historically plagued by a strong

monopoly (AT&T) and government involvement via the Federal Communications Commission (FCC). The

company background can be broken down into three eras based on antitrust lawsuit decisions.

Before the First Antitrust Suit (Before May 1974)In 1971, the FCC allowed new long distance companies to compete, and MCI began construction

of its telecommunications network. MCI wanted more growth, but AT&T was refusing interconnection

services. MCI sued AT&T in 1974, won the suit, and resumed construction of its network.

Before the Second Antitrust Suit (June 1974 January 1982)MCI started turning a profit in 1976 with its successful Execunet service. The service allowed

MCI to attract small business subscribers who could not afford a dedicated long-distance line. MCI

became very profitable and exhausted its tax loss carry forward by the end of FY1981. MCI began

offering Execunet type services to residential customers, and saw the potential growth, yet they were

constrained by their lack of investment capital. SVP Brian Thompson noted that MCI needed more

funds, saying, Economies of scale and scope are everything in this business.

After the Second Antitrust Suit (February 1982 Today)MCIs main competitor, AT&T, has been the target of recent antitrust lawsuits that stand to

significantly change the landscape of the telecommunications business. The settlement calls for the


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separation of AT&T long distance from its local telephone company subsidiaries. AT&T Communications

would now compete directly with MCI, GTE, and ITT. The newly independent local telephone companies

would be forced to provide equal quality of access to all providers, and therefore the rates paid by MCI

would have to rise by about 80% in 1984. MCI will have the opportunity to take some of AT&Ts 95%

market share but MCIs cost advantages will erode and AT&Ts competitive flexibility will increase.

SWOT Analysis Pre AT&T BreakupMCI had many strengths before the breakup of AT&T. The Execunet service and the acquisition

of Xerox and Western Union International were profitable. Their capital structure and financing had

allowed them to continually increase capital and expand. Additionally, they had a cost advantage over

AT&T. However, they still lacked additional investment capital and market share.

MCIs opportunities included huge possible growth in the residential Execunet market and small

growth in market share and plant and equipment. Their threats came from the AT&T monopoly and FCC

regulation. MCI was in an excellent position for mild growth before the AT&T breakup, but they were

not really ready to go full steam ahead because they faced the monopoly. The AT&T breakup will put

them in a better position. The Pre AT&T Breakup SWOT is shown in Appendix 1.

SWOT Analysis Post AT&T BreakupThe FCCs breakup of AT&T created all new SWOT for MCI. They still had their successful

Execunet business. They may still enjoy their lower costs for a small time period but they no longer have

the burden of the AT&T monopoly. Their stock value is at an all-time high and they have $550 million in

cash. Their weaknesses still are their lack of additional investment capital and lack of market share.

They are also facing an erosion of competitive advantage due to the FCC ruling.

MCIs new opportunities include stealing some of AT&Ts 95% market and they can do this by

using their high stock value and cash. Their interest coverage ratio is high suggesting that they can


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easily handle more debt. They should be able to leverage their financial policy to raise capital and

expand. Additionally they have the opportunity to implement a new product, MCI Mail. MCIs new

threat is that AT&T will try to compete on price. The Post AT&T Breakup SWOT is shown in Appendix 2.

MCIs Past Financial StrategyMCI has had several successful capital campaigns in the past. Their first fundraising attempts

carried higher interest rates because MCI was a riskier company at the time. MCI often secured loans by

offering them with put warrants on their stock shares. After MCI began to be profitable, they were able

to use a tax loss carry forward to reduce their taxable income.

When the Execunet program began to generate significant profits, MCI again needed capital to

expand. In 1978, MCI had the opportunity to accelerate their growth with additional capital. MCIs

previous loans had covenants on them preventing further debt, but MCI was able to circumvent this

restriction by paying off the loans. Eventually MCI was able to enter the public capital markets and raise

money by selling convertible preferred stock. Preferred stock offered dividends to the holders and

allowed them to convert to common stock. MCI used this method so that they would not deflate the

value of their common stock. The dividend was also a tax shield for corporate investors since MCI still

had carry forward tax losses. Lastly, there was a call provision on the preferred stock that could be

exercised by MCI and forced the holders to convert to common stock. This would prevent preferred

stock from draining cash flows. Because MCIs stock was steadily rising, MCI was able to issue preferred

stock, convert it to common stock in several months, retire the old debt, and take on new debt.

MCI also began selling subordinated debentures and convertible debentures. These debentures

were eventually converted into common stock, and MCI was able to continue taking on even more debt.

The company was very profitable and, even though the number of common shares was growing, the

stock value was also growing. The rates on MCIs debt were high, but the company was so profitable

that it was able to easily cover the interest expense.


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MCI was able to expertly use debt to leverage the company and explode with the growth in the

market. They sold convertible securities, converted them to common stock, and took on more debt.

This process was repeated many times, each time allowing MCI to continue to grow further through the

increase in capital. When MCI issued these debts, it was taking a very large risk. The interest rates were

high, and the company would have very serious financial problems if they were not able to grow.

Management had significant confidence in the company and issued the high cost debt because they

believed that the cost of debt was secondary to the need for available funds to grow. It was a great

gamble, but it turned out that they were right. A chronology of significant MCI events is shown in

Appendix 3. MCI now needs to figure out how to position itself for the future growth opportunities.

MCI Financial Analysis for GrowthMCI believes it has a great opportunity for growth; however, it needs to figure out several

financial structure questions. MCI needs to determine out how much money it is going to need in the

coming years, where it can get that money, and how much it is going to cost them.

Calculation of Cost of Debt and Cost of EquityThe first part of the process is to calculate the cost of the money; the required return on debt

(rD) and the required return on equity (rE). To do this, an equity Beta for MCI is needed. This was done

by comparing MCI returns to S&P 500 returns for a period of 3 years and a period of 5 years. The Betas

were vastly different and so the Beta for the 3 year period was used so that the more current correlation

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 value. The equity beta value is 1.822 (Appendix 4).

After calculating the beta, the next step is to calculate an Expected return on the market from

equity investors. To do this, data from two different S&P 500 data sets was used and the monthly

returns were calculated. The average monthly return was near 1.00%, giving a compounded yearly


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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 calculation.

The next step involves determining a risk-free rate of return. This was calculated using the

average return on the 13-week t-bill for the same 1980 to 1983 period. The corresponding data is

shown in Appendix 7 and the calculated risk-free rate 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 rD = 12.46%. This is very high

considering the expected market rate is only 12.75%. To account for this, the average return for Utilities

Preferred Stock (Medium) was calculated and found to be 14.17%. This was the value used for the

expected return for the market (instead of the 12.75%) because it was calculated from similar

companies preferred stock. This data and corresponding calculations are shown in Appendix 8.

The calculation for the required return on equity (rE), using the CAPM, is shown in Appendix 9.

The calculation shows that MCIs cost of equity is 16.17%. All of the rates are shown in Appendix 10.

Calculation of MCIs Future Financial Needs

Exhibit 9A of the case projected MCIs capital investment needs for FY1984 FY1990. These

rates, and the data in the case, were used to create Pro Forma Balance Sheet, Sources and Uses, and

Income Statement for the corresponding fiscal years. These are shown in Appendix 11, 12, 13

respectively. The Pro Forma statements show that MCI is going to need significant cash in order to

undertake the capital investment plans that will allow it to achieve the 20% market share that it desires.

The projections call for capital expenditures ranging from $890 million in FY1984 to $2.76 billion in

FY1987. MCI does not generate that much cash, and so it needs to generate additional capital.

The proposed means of generating this additional capital are tabulated in Appendix 14. MCI will

begin by selling $481 million in common stock in the same manner that it has sold it in the past. The

share price is currently $47 per share and MCI needs to capitalize on the high value of the shares while it


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can. This amount will satisfy MCIs needs for 1984. From 1985 to 1989, MCI will sell convertible

debentures in the same manner that it has in the past. The debentures will be convertible so that MCI

can add them to the common stock and then continue to issue more debt. The cost of this debt is the

calculated rD (12.46%) although it may be lower considering that recent interest rates have been

significantly lower. Each year from 1985 to 1989, MCI will take on additional debt and convert some of

the older debt (although the conversion was not taken into account in the financial statements). The

proposed additional debt will give MCI the money it needs to execute all of its expansion plans and take

advantage of the FCC breakup of AT&T.

The additional debt will change MCIs financial ratios to be more in line with other pure-play

competitors. This effect is shown in Appendix 15. MCIs current ratio will drop and its debt ratio will

rise. If MCI continues to be profitable, it will have no problem converting the debt or paying it down.

The revenue will greatly increase and MCI will be able to compete on more even terms with AT&T.

ConclusionMCI is poised to be very profitable, but they need the capital infusion that will enable the

growth. MCI has an excellent history of taking on debt, converting it into equity, and taking on

additional debt. The company should continue to do this, especially as it experiences astounding

growth. MCIs calculated cost of equity and cost of debt are reasonable, and should allow MCI to

borrow the money from the public and private sectors and put it to use growing the company. If growth

does not hit target levels, MCI needs only to slow down their proposed increase in debt. If growth

exceeds target levels, MCI will need to search for more capital so that it can capitalize on the new

possibilities. MCI has a great opportunity ahead of itself because of the FCC breakup of AT&T, and the

company needs to be ready to step into the vacuum created by the breakup. They need to obtain the

required capital shown in Appendix 14, so that the company can take advantage of its growth potential.


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Appendix 1 Pre AT&T Breakup

Strengths:

Execunet Service (business +residential)

Tax loss carry forward

Acquistions of Zerox and WesternUnion International

Financial lending terms

Lower fees to local telephonenetworks

Weaknesses:

Lack of investment capital

Lack of market share

Opportunities:

Residential growth in execunet

Possibility of expanding market

Expanding capital investment

Threats:

FCC regulation

AT&T abusing their power andfreezing MCI out of the market

GTE, ITT competition


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Appendix 2 Post AT&T Breakup

Strengths:

Execunet Service (business +residential)

FCC Lifted restrictions

High stock value

$550 million in cash

Weaknesses:

Lack of investment capital

Lack of market share

Erosion of competitive advantage

Opportunities:

Growth into AT&T's 95% marketshare

Use of high stock value and $550million cash

High interest coverage ratio

Use of financial policy to getinvestment capital

MCI Mail

Threats:

AT&T Competition and abuse

GTE, ITT competition

FCC meddling

Increased fees and competition

from AT&T


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Appendix 3 Chronology of Significant Events


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Appendix 4 MCI Beta Calculation


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Appendix 5 S&P 500 Data Set 1 (1980-1983)From http://www.econstats.com/eqty/eqem_mi_1.csv

Month %Chg for Month Average Monthly Return 1.01%

1983-03 3.309 Compounded Yearly Return 12.75%

1983-02 1.9

1983-01 3.313

1982-12 1.523

1982-11 3.597

1982-10 11.045

1982-09 0.761

1982-08 11.598

1982-07 -2.299

1982-06 -2.029

1982-05 -3.916

1982-04 4.0011982-03 -1.017

1982-02 -6.055

1982-01 -1.754

1981-12 -3.008 1980-12 -3.387

1981-11 3.659 1980-11 10.238

1981-10 4.915 1980-10 1.602

1981-09 -5.383 1980-09 2.517

1981-08 -6.21 1980-08 0.584

1981-07 -0.221 1980-07 6.504

1981-06 -1.041 1980-06 2.6971981-05 -0.166 1980-05 4.657

1981-04 -2.346 1980-04 4.114

1981-03 3.603 1980-03 -10.179

1981-02 1.328 1980-02 -0.438

1981-01 -4.574 1980-01 5.762


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Appendix 6 S&P 500 Data Set 2 (1980-1983)From - http://finance.yahoo.com/q/hp?s=^GSPC&a=00&b=1&c=1980&d=02&e=1&f=1983&g=m

Date Open Close % Change

3/1/1983 148.07 150.88 0.018978 Average 0.97%

2/1/1983 145.29 148.06 0.019065 Yearly 12.22%

1/3/1983 140.65 145.3 0.033061

12/1/1982 138.56 140.64 0.015012

11/1/1982 133.72 138.53 0.035971

10/1/1982 120.4 133.72 0.110631

9/1/1982 119.52 120.42 0.00753

8/2/1982 107.71 119.51 0.109553

7/1/1982 109.52 107.09 -0.02219

6/1/1982 111.97 109.61 -0.02108

5/3/1982 115.96 111.88 -0.03518

4/1/1982 111.96 116.44 0.0400143/1/1982 113.11 111.96 -0.01017

2/1/1982 119.81 113.11 -0.05592

1/4/1982 122.55 120.4 -0.01754

12/1/1981 126.35 122.55 -0.03008

11/2/1981 122.35 126.35 0.032693

10/1/1981 116.18 121.89 0.049148

9/1/1981 122.79 116.18 -0.05383

8/3/1981 130.92 122.79 -0.0621

7/1/1981 131.21 130.92 -0.00221

6/1/1981 132.59 131.21 -0.010415/1/1981 132.81 132.59 -0.00166

4/1/1981 136 132.81 -0.02346

3/2/1981 131.27 136 0.036033

2/2/1981 129.48 131.27 0.013825

1/2/1981 135.76 129.55 -0.04574

12/1/1980 140.52 135.76 -0.03387

11/3/1980 127.47 140.52 0.102377

10/1/1980 125.46 127.47 0.016021

9/2/1980 122.38 125.46 0.025168

8/1/1980 121.67 122.38 0.0058357/1/1980 114.24 121.67 0.065039

6/2/1980 111.24 114.24 0.026969

5/1/1980 106.29 111.24 0.046571

4/1/1980 102.09 106.29 0.04114

3/3/1980 113.66 102.09 -0.10179

2/1/1980 114.16 113.66 -0.00438

1/2/1980 107.94 114.16 0.057625


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Appendix 7 Risk Free Rate T-Bill Average 1980-1983From - http://research.stlouisfed.org/fred2/data/TB3MS.txt

1980-01-01 12.00 AVERAGE 11.72

1980-02-01 12.861980-03-01 15.20

1980-04-01 13.20

1980-05-01 8.58

1980-06-01 7.07

1980-07-01 8.06

1980-08-01 9.13

1980-09-01 10.27

1980-10-01 11.62 1982-01-01 12.28

1980-11-01 13.73 1982-02-01 13.48

1980-12-01 15.49 1982-03-01 12.681981-01-01 15.02 1982-04-01 12.70

1981-02-01 14.79 1982-05-01 12.09

1981-03-01 13.36 1982-06-01 12.47

1981-04-01 13.69 1982-07-01 11.35

1981-05-01 16.30 1982-08-01 8.68

1981-06-01 14.73 1982-09-01 7.92

1981-07-01 14.95 1982-10-01 7.71

1981-08-01 15.51 1982-11-01 8.07

1981-09-01 14.70 1982-12-01 7.94

1981-10-01 13.54 1983-01-01 7.861981-11-01 10.86 1983-02-01 8.11

1981-12-01 10.85 1983-03-01 8.35


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Appendix 8 Calculation of MCIs rD

MCI Average rD = 12.46%

Utility Medium Preferred Stock 14.17%

Industrials Utilities

Bonds Preferred Stock Bonds Preferred Stock

Issue Date A BBB Medium Speculative A BBB Medium

MCI

Bonds

Dec. 1978 9.17% 9.76% 9.45% 10.34% 9.50% 9.78% 10.48% 10.56%

Sept. 1979 9.74% 10.41% 9.76% 11.53% 10.05% 10.51% 10.97% 12.00%

Jul. 1980 11.35% 11.74% 10.56% 10.91% 11.54% 12.60% 12.32% 15.00%

Oct. 1980 12.92% 13.03% 11.43% 11.98% 12.79% 14.14% 14.32% 12.27%

Apr. 1981 13.29% 14.18% 13.19% 13.65% 14.01% 15.17% 15.12% 16.80%

Aug. 1981 16.25% 17.25% 13.46% 14.99% 17.50% 18.00% 15.85% 10.25%

May 1982 15.50% 16.50% 13.16% 14.62% 16.25% 17.00% 14.93% 10.00%

Sept. 1982 13.75% 14.63% 13.21% 14.49% 14.00% 15.13% 14.11% 15.17%Mar. 1983 12.50% 13.00% 11.36% 12.67% 12.75% 13.25% 12.51% 7.75%

Appendix 9 Calculation of MCI Required rE

= + = 11.72% + 1.822 14.17% 11.72% = 16.17%

Appendix 10 Table of Rates

1980-1983 Value

MCI Beta 1.822

S&P 500 (market) 12.75%

Utility Rate 14.17%

Risk-free T-Bill Rate 11.72%

MCI Required rE 16.17%

MCI Required rD 12.46%


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Appendix 11 MCI Pro Forma Balance Sheet

Market Share 4% 6.20% 9.60% 13.50% 18.60% 19.80% 20% 20%

1983 1984E 1985E 1986E 1987E 1988E 1989E 1990E

Cash and equiv. 542 442 342 192 99 99 99 165 Note AR 162 251 389 547 753 802 810 810 Note

Other 9 14 22 30 42 45 45 45 Note

Current Assets 713 707 752 769 894 945 954 1,020

Plant, Equip. 1,324 2,041 3,236 4,755 6,914 7,622 7,902 8,136 Note

Other 27 51 79 111 153 163 165 165 Note

Total Assets 2,064 2,799 4,068 5,636 7,962 8,731 9,021 9,321

AP 251 389 602 847 1,167 1,242 1,255 1,255 Note

Taxes 22 34 53 74 102 109 110 110 Note

Short-term debt 48 48 48 48 48 48 48 48 Note

Current Liabilities 321 471 703 969 1,317 1,399 1,413 1,413

ong-term debt 896 896 1,951 3,162 5,036 5,498 5,511 5,511 Note

Deferred taxes 88 153 241 347 467 607 753 893 Note

Total Liabilities 1,305 1,520 2,895 4,478 6,820 7,504 7,677 7,817

Preferred stock (par) - - - - - - - - Note

Common stock (par) 12 12 12 12 12 12 12 12 Note

Surplus capital paid in 576 1,057 1,057 1,057 1,057 1,057 1,057 1,057 Note

Retained earnings 171 210 104 89 72 158 275 435 Note

Total Liabilities, net

worth 2,064 2,799 4,068 5,636 7,962 8,731 9,021 9,321

Note A - Cash used for investment

Note B - Growth based on market share

Note C - Based on Exhibit 9A in Case

Note D - No change in short-term debt

Note E - Long term debt issued to raise funds for P&E

Note F - Preferred stock kept at 0, Common stock kept at 12

Note G - Common stock sold to raise funds for P&E


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Appendix 12 MCI Pro Forma Sources and Uses1983 1984E 1985E 1986E 1987E 1988E 1989E 1990E

Funds from Operations

Retained earnings 171 210 104 89 72 158 275 435 Note A

Depreciation 109 173 272 412 601 749 800 826 Note A

Other 57 70 92 112 126 148 155 148 Note B

Total 337 453 468 613 799 1,055 1,230 1,409

External Financing

Net increase in lease obligations (18) 20 20 20 20 20 20 20 Note C

Other net borrowing, sale of securities 842 481 1,055 1,211 1,874 462 13 - Note D

Total 824 501 1,075 1,231 1,894 482 33 20

Total sources 1,161 954 1,543 1,844 2,693 1,537 1,263 1,429

Uses of Funds

Investment in Plant and Equip 623 890 1,467 1,931 2,760 1,457 1,080 1,060 Note A

Acquisitions 195 - - - - - - - Note E

Increase in working capital (55) 164 176 63 26 80 183 303 Note F

Change in cash holdings 398 (100) (100) (150) (93) - - 66 Note G

Total Uses 1,161 954 1,543 1,844 2,693 1,537 1,263 1,429

Note A - Based on Exhibit 9A in Case

Note B - Deferred Taxes increase + Employee Stock Purchase Plan

Note C - Average over past 6 years

Note D - Capital raised

Note E - Assumed no more acquisition, just investment in P&E

Note F - Adjusted for assumed need

Appendix 13 MCI Pro Forma Income Statement

1983 1984E 1985E 1986E 1987E 1988E 1989E 1990E

Revenue 1,073 1,850 3,160 4,870 7,380 8,660 9,600 10,560

Operating Income 295 380 390 590 890 1,125 1,345 1,580

Interest expense 75 100 231 382 616 673 675 675 Note A

Interest income 21 13 3 4 4 5 5 5

Profit before tax 241 293 162 212 278 457 675 910

Tax provision 70 83 58 123 206 299 400 475

Net income 171 210 104 89 72 158 275 435

Preferred dividends - - - - - - - -

Incomefor common stock 171 210 104 89 72 158 275 435

Note A - Increases as increased Debt taken on


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Appendix 14 MCI Proposed Financial Moves

1984E 1985E 1986E 1987E 1988E 1989E 1990E

Common Stock 481

Convertible Debentures 1,055 1,211 1,874 462 13

Appendix 15 Financial Ratio Analysis ($ billions)

1983

MCI 1990E MCI AT&T GTE ITT

Revenue 10.6 1.1 65.1 12.1 16

Net income 0.43 0.17 6.99 0.9 0.7

Assets 9.3 2.1 148.2 21.9 14.1

RoS 26.50% 15.90% 10.7 7.4 4.4

RoA 10.2% 11% 8.6 4.1 4.8

RoE 28.9% 32.40% 12.2 15.6 12.7

Debt ratio 79% 55% 43% 57% 38%

Current ratio 0.72 2 0.9 1 1.3

Interest coverage 2.3 4.2 3.6 2.4 2.5

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