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POLAROID CORPORATION
Group members:
Merlind Weber
Ana Maria Fulger
Cristina Balan Huma
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Debt composition
- Assuming that the book value of debt is equal to the market value of the debt (there are no
costs of bankruptcy) we can infer the following capital structure:
- The market value of the equity is about three times bigger than the book value of the
equity. These values would indicate that at the moment the stock is overvalued by investors
Investment Banking & Financial Engineering - The Polaroid Case – 05/11/2009
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50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
Book Value long term debt/Capital Market Value Long term debt/Capital
- Founded in 1937 by Edwin Land, Polaroid has been for a long time after its foundation an
all equity firm.
- A major change in the firm’s capital structure occurred from 1988 to 1989 when the debt
to capital ratio increased up to 56%, as a response to the unsolicited tender offer from
Shamrock Holdings, when the management decided the use of an employee stock
ownership plan (ESOP).
- There have not been any major changes in the debt level after 1988-1989. An important
issue to date (1995) is whether the actual level of debt is sustainable and adequate for
Polaroid’s business model and the industry they operate in.
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Total debt/Capital including short term debt 26% 33.60% 39.70% 47.80% 59.40% 69.50%
Total debt 585.81 759.96 897.93 1081.14 1343.51 1571.95
Free operating cash flow/total debt 60% 26.80% 20.90% 7.20% 1.40% -0.90%
Total Debt 145 324.62 416.268 1208.33 6214.28 9667.87
Long term debt/capital 0.133 0.211 0.316 0.427 0.556 0.655
Long term debt 110.097 191.9324 331.569 534.8305 898.7414 1362.59
• The findings in this exhibit are consistent with the actual BBB rating Polaroid has and its long term
debt value of 526.7
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5. What EBIT coverage ratios would result from the borrowings implied in each
rating category?
EBIT coverage ratio relates the company’s earnings before interest and taxes to its interest expense. The lower the interest
coverage ratio, the higher will be the company's debt burden and the greater the possibility of bankruptcy or default. That is
why this ratio should increase when moving from junk B rated companies to AAA rated companies. Having an EBIT of 89.2 in
1995, Polaroid’s EBIT coverage ratio is 7.1. Using exhibit 11, one may compute the EBIT coverage ratios for each rating
category.
The EBIT coverage ratio for Polaroid in each credit rating category is very sensitive to the future earnings before interest and
taxes the enterprise will generate and to the evolution of the cost of debt for each category. Taking into account the interest
coverage ratio is important because it can give a clear picture of the short-term financial health of the business. As it can be
seen above, Polaroid will not only need to lower its debt but also will need to generate a higher EBIT in order to qualify for a
better rating.
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4. Is the current capital structure the result of explicit capital structure management
or past benefits and distribution policy?