MCI Communications Corp., 1983

/MCI Communications Corp., 1983
MCI Communications Corp., 1983 2019-08-19T11:45:45+00:00

Questions for MCI Communications Corp1983  case:

  1. Find the value of MCI based on the free cash flows during the forecast period only (exhibits 9A and 9B) i.e ignoring the continuing value or terminal value. Assume WACC (Weighted average cost of capital) = 14% and inflation = 4%.

The Discounted Free Cash Flow Model for MCI

Years Ending December 31
|-------------------- Forecast -----------------------------|
19831984198519861987198819891990
Earnings before Interest and taxes (EBIT)2953803905908901,1251,3451,580
Net taxable earnings2953803905908901,1251,3451,580
Federal and State Income Taxes708358123206299400475
Net Operating Profit After-Tax (NOPAT)2252973324676848269451,105
Add back depreciation and amortization104173272412601749800826
Subtract Capital Expenditures(632)(890)(1,467)(1,881)(2,710)(1,357)(980)(960)
Subtract New Net Working Capital00000000
Free Cash Flow($303)($420)($863)($1,002)($1,425)$218$765$971
Terminal value, 2011
Present Value of Free Cash Flows @ 14%($265.79)($323.18)($582.50)($593.26)($740.10)$99.32$305.72$340.39
Total Present Value of Company Operations($1,759)Millions
The formula for calculating the terminal value is:
TV  =  (FCFn x (1 + g))  /  (WACC – g) $ 10,098.40Millions
Where:
TV = terminal value?
FCF = free cash flow$971
g = perpetual growth rate of FCF4%
WACC = weighted average cost of capital14%

2:Find the continuing value (or terminal value) to complete the DCF (Discounted Cash Flow) analysis. Based on the analysis, is MCI fairly valued at $47 ?

Years Ending December 31

19831984198519861987198819891990
Earnings before Interest and taxes (EBIT)2953803905908901,1251,3451,580
Net taxable earnings2953803905908901,1251,3451,580
Federal and State Income Taxes708358123206299400475
Net Operating Profit After-Tax (NOPAT)2252973324676848269451,105
Add back depreciation and amortization104173272412601749800826
Subtract Capital Expenditures(632)(890)(1,467)(1,881)(2,710)(1,357)(980)(960)
Subtract New Net Working Capital00000000
Free Cash Flow($303)($420)($863)($1,002)($1,425)$218$765$971
Terminal value, 1990 $      10,098.40
Present Value of Free Cash Flows @ 14%($265.79)($323.18)($582.50)($593.26)($740.10)$99.32$305.72$3,880.48
Total Present Value of Company Operations$1,781Millions
Plus Current Assets713Millions
Total Market Value of MCI Assets$2,494Millions
Common Shares outstanding12Millions
Per share value$207.81
Per share value without considering current assets$148.39

Considering the above calculations, it is evident that MCI is severely undervalued. Its per share value should be 148.39 USD if its earning projections are realistic.