McI

1.What is the likely level of MCI's external needs over the next several years? By how much could they reasonably be expected to vary? Why?

MCI's external needs will continue to expand for the next decade according to increasing projected market expansion (20% in the next 6 years) and decrease in operating margins due to more competition. The only alternative for the company is to realize the projected market share increase forecasted on Exhibit 9 is to invest more in its network since the telecom industry is extremely capital intensive. For example, in 1983 in order to raise $1 of revenue, $1.15 needs to be invested in plant and equipment first.

MCI's operation margin is expected to be 15% in 1990 and stay relatively steady since by that time it is expected that the company would have built the needed infrastructure and focus on retaining customers while signing up new customers. Furthermore, competition in the industry would have an impact on the operational margins which reflects their external needs. "Dual pressure of higher access charges and increased competition from both AT&T and other long-distance suppliers" could affect the operational margin to fluctuate between 8% and 22%. For example, if there are unfavorable regulatory and legislative actions combined with very aggressive competitors the operation margin can decline from 15% to 8%. The lost 7% in operating margin (22% in sales) has to be compensated by additional debt or equity financing.

*All values divided by 1,000,000 Pro Forma Balance Sheet

market share 4.0% 6.2% 9.6% 13.5% 18.6% 19.8% 20.0% 20.0%

Balance Sheet 1983 1984 1985 1986 1987 1988 1989 1990

Assets Cash, cash equivalents 542 442 342 192 99 99 99 165

Accounts receivables (1) 162 251 389 547 753 802 810 810

Other (1) 9 25 22 30 42 45 45 45

Current assets 713 718 753 769 894 946 954 1020

Plant equipment, net (3) 1324 2041 3236 4755 6914 7622 7902 8136

Other (1) 33 51 79 111 153 163 165 165

Total assets 2070 2810 4068 5635 7961 8731 9021 9321

Liabilities Accounts payable (1) 251 389 602 847 1167 1242 1255 1255

Accrued taxes (1) 22 34 53 74 102 109 110 110

Short term debt (2) 48 48 48 48 48 48 48 48

Current liabilities 321 471 703 969 1317 1399 1413 1413

Long-term debt (4) 896 896 3160 4870 7380 8660 9600 10560

Deferred income taxes (3) 88 153 241 347 467 607 753 893

Total liabilities 1305 1520 4104 6186 9164 10666 11766 12866

Equity Preferred stock (par value) (5) 0 0 0 0 0 0 0 0

Common stock (par value) (5) 12 12 12 12 12 12 12 12

Surplus capital paid in (6) 576 1057 1057 1057 1057 1057 1057 1057

Retained earnings (3) 177 210 104 89 72 158 275 435

Total liabilities and net worth 2070 2799 5277 7344 10305 11893 13110 14370

Additional Funds Needed per year 1981 1835 2432 2568 3363 1163 671 636

Accumulated Additional Funds Needed - 3815 6,247 8,815 12,178 13,341 14,012 14,648

Exhibit 1. Pro Forma Balance Sheet.

The additional Funds Needed are calculated according to formula:

AFN=Required increase in assets-Increase in spontaneous liabilities-Increase in retained earning.

There are some assumptions that were used to calculate all numbers in the above table:

growth based on expected revenue

no change from year 1983 to 1990

data taken from exhibit 9 in the case

long term debt issued to raise funds for plant and equipment investments

PS keep at 0, CS keep at 12

common stock sold to raise funds for plant and equipment investments

Pro Forma Sources and