MCI is a leveraged firm and taxation influences the value of this firm.
The last question asks whether we would recommend this new debt and repurchase of stock alternative to the MCI Board of Directors. Naturally, we will support our recommendation with data generated from the first two questions above. We recommend the board at MCI to issue the additional $2 billion in debt and to apply the capital to repurchase MCI stock based on MCI's current Weighted Average Cost of Capital (WACC) is 0.362. We realize that by adding the additional $2 billion in debt, their WACC decreased to 0.356. We realize that this is not a significant drop in the cost of capital; however, it is a decrease in cost.
The next thing that we need to focus on is how the additional debt and repurchasing of stock effects the companies stock ratios. Since one of MCI's stated goals is to increase share holders value, we want to find out if the change in capital structure help the overall stock value? The answer can be found in question one. According to calculations, we determined that the PE Ratio increased from 33% to 40%. In addition, the price per share increased with this additional debt from $27.75 to $32.31.