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MCI Communications, Corp.: Captial Structure Theory.
Member rating: No Rating | Words: | Submitted: Thu Jul 08 2004
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MCI Communications, Corp.: Captial Structure Theory Executive Summary Throughout most of 1995, MCI Communication, Corp. had been performing rather slowly in a stable market. Due to the restlessness this caused amongst shareholders, MCI decided to establish a program to repurchase some of its outstanding common stock as a means to enhance shareholder value. They have asked Lynch Investments for advice on whether the company should substantially increase the use of debt to repurchase shares. After an analysis of the company's EBIT vs. EPS, the WACC and a FRICTO analysis, MCI should use debt to repurchase shares. By issuing about $2 billion of debt, MCI will increase earnings per share. Although the WACC and the cost of equity will be higher due to the increase in debt, the WACC will remain moderate compared to its competitors in the industry. A FRICTO analysis further validates the decision to increase the use of debt to...
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