McI Case

Q4

MCI has been very profitable, how every they are facing more competition and opportunities especially after the AT&T break out. They need a lot of fund to continue growth and take more market shares, so they should do exactly they been doing in the past, which is taking debt and covert it to equity( common stock) and take new debt. However, because they are very profitable , they should decrease their debt level and maintain in a certain level if the stock price keep going in the right direction. By doing this, they can getenough capital and catch the potential growth opportunities. 

Firstly, as we had mentioned, it is best that we take long-term debt as MCI can take advantage of lower interest rates for such debt, as well as have this debt match the duration of their capital expenditures for the future.

Secondly, the convertible warrants allow for a lower interest rate as investors are willing to make a tradeoff on higher rates for an opportunity to take part in any equity gain if MCI’s stock sees a significant gain. Additionally, if these conversions do happen, it would be a clear signal to the market that MCI is competing effectively against AT&T, and may be able to allow them to attract more capital with relative ease.

Finally, it is prudent that MCI find as much financing as possible (hence picking the option yielding the largest amount of cash) as we have established that the market that MCI is competing in will become highly unpredictable in the next few years.

We disregard the other options for the following reasons:
(a)Does not raise the most capital and has a higher interest rate. (b)Does not raise enough capital, and a common stock issuance would send the wrong signals, lowering share price and making it more difficult to raise capital in the future. (c1) Slightly higher interest rate than (c2), and the convertibility is less favorable for MCI than in (c2). (d) MCI would be unable to fund its operations if they do nothing.