**Questions for MCI Communications Corp1983 case:**

- 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.**