Case Study on "The Polaroid Corporation"

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1.1 Introduction
Polaroid Corporation was founded in 1937 by Edwin Land who dropped out of Harvard College in order to focus on the research on the polarization of light. He developed the first instant camera in 1948. From that time onwards the instant camera was the main product of the company. 90% of the company’s efforts were tied up to this product over the next decades. Within four decades, sales of the firm grew from $142000 to over $1 billion. Significant break- through of Polaroid included:

➢ Instant Black &White film (1954)
➢ Instant color film (1960)
➢ And the SX-70 camera and film (1972)
Protected by patents, the competition for the company in the field of instant photography was low. The attempts to diversify its product line basically failed. At the end of 1995, photographic products were still accounting for 90% of Polaroid’s revenues. In the digital area, Polaroid is facing various large competitors, such as Xerox, Sony and 3M. However, Polaroid’s research and development in that area is subject to heavy start-up costs in 1996. The case takes place in late March 1996. A new CEO Gary T. DiCamillo has been appointed in November 1995, as the first outsider. He is supposed to bring the company back on track after 10 years in which the share price has been lacked behind the market, as it can be seen in the graph “Average P/E” below: [pic]

The former president of Black & Decker’s Power Tool unit proposed a new restructuring plan through which the existing Polaroid brand should be exploited aggressively, new product extensions should be introduced and the entering into new emerging markets, such as Russia, should further increase the performance of the firm.

1.2 Current situation and financial issues
Ralph Norwood has just recently been appointed treasurer of Polaroid. Faced with notes outstanding of $150 million which will mature in less than a year, as well as the restructuring plan of the new CEO which needs funding, Norwood decided to present a larger review of the company’s financial policies to the board of directors. Based on the circumstances, there are several challenging objectives, which the new financial policy of Norwood would have to meet. These are described in the following:

1. Serving the maturing debt
One of the main objectives of the company has to serve the outstanding debt. In addition, the maturity structure of the debt should be reconsidered. As it can be seen in the graph below, the debt is not evenly distributed over the years. In 1997 for example, one third of the total debt becomes due. [pic]

2. Maintaining an investment grade rating
For Polaroid it is important to maintain an investment-grade rating which is BBB or higher. A rating of BB or lower is considered noninvestment grade and is usually referred to as high yield or junk debt. In order to preserve the good image of the brand, Norwood does not want the company’s bonds to be associated with junk bonds. The treasurer sees the EBIT coverage ratio as the main measure of credit quality. 3. Provide funding for the new plans of the CEO

Providing enough funds for the restructuring plans of the CEO is another main objective of the financing of the firm. The restructuring plan is supposed to bring Polaroid back to higher growth ratios and “revitalize the instant photography business”, as well as emerge in the electronic imaging business (Polaroid, 2008b). 4. Attaining an optimal capital structure for the firm

At the optimal capital structure, Polaroid’s cost of capital (WACC) is at a minimum and the value if the firm is maximized. Beside the other goals of the company, the value maximization is (most) important to create the most value for the shareholders.

2.1 Economic Analysis
In 1996 the capital market conditions in the debt market was favorable as the United States economy continued in its fifth year of economic expansion. The equity markets seemed to be pausing after a phenomenal advance in...
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