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Overview MCI Communications Corp a long-time client of Lynch Investments is inquiring about establishing a program to repurchase some of its outstanding common stock Their stock has been somewhat sluggish in an otherwise buoyant market and has indications that stockholders are becoming restless from the corporations lack of stable growth MCI Communications Corp Case 2004 An earlier meeting held by MCI an idea was proposed for the company to repurchase some of its outstanding common stock which would increase MCIs debt financing and would eventually double the current debt to equity ratio almost to 80 To repurchase to stock MCI would be required to take on an additional 2 billion in debt This will give the perception to the market that the company was performing well and therefore increase both interest and sales for their stock MCI Communications Corp Case 2004 Some feel that this approach is too drastic and proposed an open-market purchase program that will allow the company to repurchase their own stock but only when corporate funds would enable them The upside to this approach is that would not require such a large increase in debt for MCI The downside is that it might not give immediate results in regards to gaining interest in the stock 1 What would be the effects of issuing 2 billion of new debt and using the proceeds to repurchase shares on the following Book value of MCI equity Price per share of MCI stock Earnings per share of MCI stock By using the 2 billion in additional long-term debt would increase the debt-equity ratio in terms of book value from 411 39449602 to 519 59447602 MCI should use the debt and equitys market value not book value in order to determine their debt-equity ratios for better analysis We used the EBITEPS analysis to determine which position would provide better earnings per share The analysts took on the additional 2 billion in debt which
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