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 -----------------------------|
1983 1984 1985 1986 1987 1988 1989 1990
Earnings before Interest and taxes (EBIT) 295 380 390 590 890 1,125 1,345 1,580
Net taxable earnings 295 380 390 590 890 1,125 1,345 1,580
Federal and State Income Taxes 70 83 58 123 206 299 400 475
Net Operating Profit After-Tax (NOPAT) 225 297 332 467 684 826 945 1,105
Add back depreciation and amortization 104 173 272 412 601 749 800 826
Subtract Capital Expenditures (632) (890) (1,467) (1,881) (2,710) (1,357) (980) (960)
Subtract New Net Working Capital 0 0 0 0 0 0 0 0
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)  $ 10,098.40 Millions
Where:
TV = terminal value ?
FCF = free cash flow $971
g = perpetual growth rate of FCF 4%
WACC = weighted average cost of capital 14%

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

1983 1984 1985 1986 1987 1988 1989 1990
Earnings before Interest and taxes (EBIT) 295 380 390 590 890 1,125 1,345 1,580
Net taxable earnings 295 380 390 590 890 1,125 1,345 1,580
Federal and State Income Taxes 70 83 58 123 206 299 400 475
Net Operating Profit After-Tax (NOPAT) 225 297 332 467 684 826 945 1,105
Add back depreciation and amortization 104 173 272 412 601 749 800 826
Subtract Capital Expenditures (632) (890) (1,467) (1,881) (2,710) (1,357) (980) (960)
Subtract New Net Working Capital 0 0 0 0 0 0 0 0
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 $1,781 Millions
Plus Current Assets 713 Millions
Total Market Value of MCI Assets $2,494 Millions
Common Shares outstanding 12 Millions
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.