polaroid corporation case solution - final.pdf

9/9/2015

Polar oid C or por ati on, 1996

Polaroid Corporation, 1996 * Required

Case Summary Summary Provide brief summary of the case (Not more than 300 Characters) * Ralph Norwood of Polaroid Corporation is considering multiple options related to the firm's debt outstanding of $150 million @ 7.25% notes. The case requires us to work out how much flexibility Polaroid's business will require in future years. We also have to evaluate options to improve investment grade rating “BBB” to ensure flow of money from investors.

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9/9/2015

Polaroid Corporation, 1996

Polaroid Corporation, 1996 * Required

Case Problem - 1 Describe ‘Problem 1’ – Less than 200 Characters * Polaroid has a rating of S&P (BBB) and Moody’s (Baa3). This debt rating was considered investment grade whereas the next lower rating was considered non-investment grade.

List out the Corporate Finance Theories that can be used to Solve ‘Problem 1’ – Less than 200 Characters * Bond ratings are derived from financial ratios: EBITDA Interest coverage Funds flow/total debt Free operating cash flow/total debt return on capital Operating income/sales long-term debt/capital

What are the various ways / methods of addressing or solving ‘Problem 1’? Less than 200 Characters * They need to decrease the leverage for a while by additional paid-in capital to improve the stability. This will improve rating & allow to borrow money for less cost in future.

What is the optimal solution to ‘Problem 1’? – Less than 100 Characters *

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9/9/2015

Polaroid Corporation, 1996

Long term debt/capital to be brought down from 42.7% to 31.6% to achieve "A" grade rating

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9/9/2015

Polaroid Corporation, 1996

Polaroid Corporation, 1996 * Required

Case – Problem 2 Describe ‘Problem 2’ – Less than 200 Characters *

Flexibility: Ralph wants to enhance the flexibility of the company i.e. the amount of debt that can be issued while maintaining the investment bond rating.

List out the Corporate Finance Theories that can be used to Solve ‘Problem 2’ – Less than 200 Characters *

Book value of Debt / Capital Estimate of unused debt capacity - Unused debt capacity at current rating - Unused debt capacity until rating downgrade

What are the various ways / methods of addressing or solving ‘Problem 2’? Less than 200 Characters *

Polaroid can issue debt if they can settle their need for external capital with debt without facing financial constraints due to a small debt buffer.

What is the optimal solution to ‘Problem 2’? – Less than 100 Characters *

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9/9/2015

Polaroid Corporation, 1996

Unused Debt Capacity at current rating $ (52.43) mn and until rating is downgraded: $270.81 mn

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9/9/2015

Polaroid Corporation, 1996

Polaroid Corporation, 1996 * Required

Case – Problem 3 Describe ‘Problem 3’ – Less than 200 Characters * Minimize the Cost of Capital to Maximize Value Creation

List out the Corporate Finance Theories that can be used to Solve ‘Problem 3’ – Less than 200 Characters * The debt policy that minimized the cost of capital (WACC method) and took advantage of debt tax shields could create value for the shareholders.

What are the various ways / methods of addressing or solving ‘Problem 3’? Less than 200 Characters * The combination of optimal debt capacity utilization and additional paid-in capital gives better result and saves investment rating but increase our weighted average cost of capital.

What is the optimal solution to ‘Problem 3’? – Less than 100 Characters *

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9/9/2015

Polaroid Corporation, 1996

Total debt/capitalization incl. short-term debt (%) Current: 43.24% Required: 39.70% WACC: 6%

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9/9/2015

Polaroid Corporation, 1996

Polaroid Corporation, 1996 * Required

Conclusion and Recommendation What is you conclusion and Recooemndation? - Less than 100 Characters * In my view, Polaroid should seek for improvement of investment rating to A (S&P)

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