Mci Communications Free Essay Example

Question1. NPV = FCF1/(1+WACC)+FCF2/(1+WACC)^2+FCF3/(1+WACC)^3+FCF4/(1+WACC)^4+FCF5/(1+WACC)^5 +FCFp, where FCF1…FCF5 are the free cash flows in years from 1999 to 2003. FCF = Cash flow from Operations – increase in net working capital requirement – capital expenditures, discounted by WACC. For example, in 1999 FCF1 = (7965 – 516 – 4938)/(1+0,1) = 2283. Similarly, we calculate FCF2=2479, FCF3=2666, FCF4=3007, FCF5=3132.

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As we assume, that after 2003 the FCF will grow permanently by 4% by year to the infinity, we can calculate FCFp as perpetuity: FCFp = FCF2004/(WACC-g) = 54288 So finally, we got NPV = 67855 and can calculate EV = NPV + WCR (1999) EV = 81275, which is the maximum price for the Hampton Tool, that Lycos should be willing to pay.

Question2. Part1 Data Inc. has $40 billion of equity and $60 billion of debt currently. So the initial leverage (D/V) is 60%. We can calculate the cost of equity using this formula: WACC = ke * E/V + kd *(1-t) *D/V. ke = the cost of equity = 20%

Using the same formula we calculate WACC, when the leverage is 20%: WACC = 17,2% Part2 To change leverage from 60% to 20%, Data Inc.

is needed to buy back $50 billion of debt, so the leverage will be 10/(10+40) = 20%, the company’s value will decrease to $50 billion. From the other hand, Data Inc. can issue $240 billion of equity, so the leverage will be 60/(60+240) = 20%. Question3. Part1 Sources and uses exhibit Retained Earnings = Net income less preferred dividends Other funds = Deferred taxes +employee stock purchase plan Increase in adjusted working capital = working capital – cash – short-term debt

FY1984FY1985FY1986FY1987FY1988 A. Funds from operations Retained Earnings210235371588731 Depreciation173272412601749 Other6588106120140 Total44859588913091620 B.

External financing Net increase in lease obligations00000 Other net borrowing, sale of securities00000 Total00000 Total uses44859588913091620 C. Uses of funds Investment in plant, equipment8901467193127601457 Acquisitions00000 Increase in adjusted working capital00000 Change in cash holdings00000 Total uses8901467193127601457 So, providing an analysis, based on the exhibit, we assume that the need of external capital for MCI will be:

FY1984FY1985FY1986FY1987FY1988 Need in external capital44287210421451(163) With the total need of external capital of 3644 Question3. Part2 We compare two alternatives: 1. $500 million of 12,5%, 20 year subordinated debentures 2. $400 million of common stock Assume, that the WACC is 12,6% and the tax rate is 46%. Straight debtCommon stock Taxable income12 Financial distress costs21 Agency cost of equity12 Undervalued stock12 Overvalued stock21 As the income will constantly grow during the period, we concern its taxation as important. Financial distress costs are important maily because of the