Mci Communications Corp

It seemed that the board of directors at MCI was divided between two possible solutions. Should the company finance the repurchase by increasing MCI's debt financing by at least doubling the current debt-equity ration that stood at 36% at that time (MCI)? Conversely, would a more conservative approach of using an open-market purchase program, announcing its intentions to repurchase its stock from "time to time" but only as corporate funds become available, be more appropriate (MCI)? The answer to this question will help determine the path that the company will follow in the years to come. It will also either instill confidence or continue the growing sense of restlessness that is currently being exhibited by the company's shareholders. Therefore, in an effort to determine the most advantageous path for MCI, we will focus on answering the following three questions given in the course module to meet our objectives. 1) What would be the effects of issuing $2 billion of new debt and using the proceeds to repurchase shares of the following: a) the book value of MCI's equity b) the price per share of MCI's stock; and c) the earnings per share of MCI's stock. 2) What is the current WACC for MCI and what would it become after the new debt and repurchase? 3) Would you recommend this new debt and repurchase of stock alternative to the MCI Board of Directors? Explain your answer.
The first questions asks us what would be the effects of issuing $2 billion of new debt and using the proceeds to repurchase shares of the book value of MCI's equity, the price per share of MCI's stock, and the earnings per share of MCI's stock. Referring to the chart below, we realize that by accruing debt re-capitalization by issuing a $2 billion debt to purchase $2 billion stock will not affect the firm's cash flow. Based on the assumption of earning before the interest income remains the same, we have determined that the cost of debt will increased by $123 millions due to the interest accrued by