1.) Impact of the share buy-back on MCI's:
a) Shares outstanding
Assumptions
?? The assumption is made, that MCI exactly offers 2 billion $ of long-term
debt to finance its stock repurchase program and double its debt/equity ratio
(book value) from approximately 36% to 72%.
?? For the immediate buy-back of a large amount of shares MCI has to make a
tender offer for its own shares. It is assumed, that a premium of 10%
over the current share price, which results in a buy-back of $30.53 per
share.
Results
With these assumptions MCI is able to buy back 65.52 million shares for its
2 billion $ of new long-term debt, resulting in the reduction of the number of
outstanding shares from formerly 687 million to 621.48 million shares.
Thereby has to be noted that the figures in the case study differ: In MCI's
Income Statement the weighted-average number of common shares is stated
with 687 million (see case Exhibit 4, p. 360), and in the comparables sheet the
number of shares is noted as 681 million (see case Exhibit 2, page 358). In all
our further calculations we use the figure from MCI's income statement and
calculate with 687 million shares outstanding, as both figures are from the
same time frame (year-end 1995), but the one directly from MCI should be
more reliable.
Sensitivity Analysis
In order to account for the uncertainty in estimating the premium MCI will pay
in its tender offer, we did a sensitivity analysis and changed the buy-back
premium from 10% to 5% and 15%, respectively. With these premiums, MCI
is able to buy-back 68.64 (5% premium) and 62.67 (15% premium) million
shares, which results in a reduction to 618.36 and 624.33 million
outstanding shares, res ...