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PolaroidCorporation,1996
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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PolaroidCorporation,1996
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.
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PolaroidCorporation,1996
Longtermdebt/capitaltobebroughtdownfrom42.7%to31.6%to
achieve"A"graderating
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PolaroidCorporation,1996
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.
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PolaroidCorporation,1996
UnusedDebtCapacityatcurrentrating$(52.43)mnanduntilrating
isdowngraded:$270.81mn
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PolaroidCorporation,1996
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.
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PolaroidCorporation,1996
Totaldebt/capitalizationincl.shorttermdebt(%)
Current:43.24%
Required:39.70%
WACC:6%
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