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9/9/2015

PolaroidCorporation,1996

Polaroid Corporation, 1996


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Case Summary
Provide brief summary of the case (Not more than 300 Characters) *
RalphNorwoodofPolaroidCorporationisconsideringmultiple
optionsrelatedtothefirm'sdebtoutstandingof$150million@
7.25%notes.Thecaserequiresustoworkouthowmuchflexibility
Polaroid'sbusinesswillrequireinfutureyears.Wealsohaveto
evaluateoptionstoimproveinvestmentgraderatingBBBtoensure
flowofmoneyfrominvestors.

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9/9/2015

PolaroidCorporation,1996

Polaroid Corporation, 1996


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Case Problem - 1
Describe Problem 1 Less than 200 Characters *
PolaroidhasaratingofS&P(BBB)andMoodys(Baa3).Thisdebt
ratingwasconsideredinvestmentgradewhereasthenextlower
ratingwasconsiderednoninvestmentgrade.

List out the Corporate Finance Theories that can be used to Solve Problem 1 Less than 200
Characters *
Bondratingsarederivedfromfinancialratios:
EBITDAInterestcoverage
Fundsflow/totaldebt
Freeoperatingcashflow/totaldebt
returnoncapital
Operatingincome/sales
longtermdebt/capital

What are the various ways / methods of addressing or solving Problem 1? Less than 200
Characters *
Theyneedtodecreasetheleverageforawhilebyadditionalpaidin
capitaltoimprovethestability.Thiswillimproverating&allowto
borrowmoneyforlesscostinfuture.

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

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9/9/2015

PolaroidCorporation,1996

Longtermdebt/capitaltobebroughtdownfrom42.7%to31.6%to
achieve"A"graderating

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9/9/2015

PolaroidCorporation,1996

Polaroid Corporation, 1996


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Case Problem 2
Describe Problem 2 Less than 200 Characters *
Flexibility:Ralphwantstoenhancetheflexibilityofthecompanyi.e.
theamountofdebtthatcanbeissuedwhilemaintainingthe
investmentbondrating.

List out the Corporate Finance Theories that can be used to Solve Problem 2 Less than 200
Characters *
BookvalueofDebt/Capital
Estimateofunuseddebtcapacity
Unuseddebtcapacityatcurrentrating
Unuseddebtcapacityuntilratingdowngrade

What are the various ways / methods of addressing or solving Problem 2? Less than 200
Characters *
Polaroidcanissuedebtiftheycansettletheirneedforexternal
capitalwithdebtwithoutfacingfinancialconstraintsduetoasmall
debtbuffer.

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

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9/9/2015

PolaroidCorporation,1996

UnusedDebtCapacityatcurrentrating$(52.43)mnanduntilrating
isdowngraded:$270.81mn

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9/9/2015

PolaroidCorporation,1996

Polaroid Corporation, 1996


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Case Problem 3
Describe Problem 3 Less than 200 Characters *
MinimizetheCostofCapitaltoMaximizeValueCreation

List out the Corporate Finance Theories that can be used to Solve Problem 3 Less than 200
Characters *
Thedebtpolicythatminimizedthecostofcapital(WACCmethod)
andtookadvantageofdebttaxshieldscouldcreatevalueforthe
shareholders.

What are the various ways / methods of addressing or solving Problem 3? Less than 200
Characters *
Thecombinationofoptimaldebtcapacityutilizationandadditional
paidincapitalgivesbetterresultandsavesinvestmentratingbut
increaseourweightedaveragecostofcapital.

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

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9/9/2015

PolaroidCorporation,1996

Totaldebt/capitalizationincl.shorttermdebt(%)
Current:43.24%
Required:39.70%
WACC:6%

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9/9/2015

PolaroidCorporation,1996

Polaroid Corporation, 1996


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Conclusion and Recommendation


What is you conclusion and Recooemndation? - Less than 100 Characters *
Inmyview,Polaroidshouldseekforimprovementofinvestment
ratingtoA(S&P)

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