Capital Structure Theory

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 corporation's 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, …

…value would change significantly. MCI has low levels of leverage compared to the industry averages, and so it would be anticipated that both the required return on stock and the cost of borrowing would not increase disproportionately. Also, the owners equity decreased by $2 billion with a direct affect on the decreasing number of shares with no change in the price per share. The conclusion is that MCI should borrow $2 billion to buy back the stock.