Mci Communications Corp.: Capital Structure Theory (B)

Abstract

After five months of a fairly relaxed work schedule, Katzu Mizuno found himself wrapped up in an intense analysis. A first-year associate at Lynch Investments, Mizuno had received a morning phone call in February 1996. The caller was his boss, Anna Curti. The subject was a long-time customer, MCI. In contrast to the booming stock market, the performance of MCIs share price had been underwhelming. The board of directors had recently discussed repurchasing shares in order to bolster shareholder value. However, cash was tight. If MCI intended to implement a stock repurchase program within the next six months, the company would have to use debt financing to supply the cash. While the current debt-to-equity ratio of 40% was arguably below the industry average and MCI had excess debt capacity, the decision was far from simple. MCI had contacted Lynch to provide an analysis and recommendation regarding the proposed debt issue and stock repurchase. Curti needed to respond quickly, which gave Mizuno little time. The board planned to disclose the details of its plan to improve shareholder value by the end of next week. Any recommendation and accompanying analysis would be intensely scrutinized. The heat was clearly on. As Mizuno labored to complete and refine the analysis in front of him, heavy on his mind was how he would relay his findings to Anna Curti. What information and resources would she need in order to advise the client on whether to move forward with the plan?