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1. Anand Kumar (MP19002)
2. Eshan Dwivedi (MP19014)
3. Prashant Parashar (MP19022)
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Case Background
Polaroid Corporation,a company formed by Ralph Norwood has a debt outstanding of $150 millions
and it is seeking multiple options related to its Debt outstandings.The company at times of Ralph
undertook a review of the firms overall debt and equity and on the maturity structure of the debt.
The following case enables us to work out the probable flexibility the business will require in
coming years.
To ensure better flow of money from investors the ratings of the company also need to be improved.
com
Our group will study the matter keeping the financial studies associated to the problems specially
Debt vrs equity financing. was .
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Five Critical Financial Problems identified
in the case
1.Polaroid S&P rating is BBB which is an investment grade but Moody’s Baa3 is considerd
non investment grade.What are the corporate finance theories to solve this problem?
4.The current capital structure is the result of explicit capital,structure management or past benefits of
distribution policy?
perspective?
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5.From borrowings whatstudyEBIT coverage ratios would result in each category?
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Analysis and Interpretation for Solving the
Problem
SOLUTION 01:
The company needs to decrease the leverage for sometimes by additional paid in capital to improve the
staibilty.
was com
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.
By going for a long term debt/capital will be brought down f om 42.7% to 31.6% to achieve
“A” grade rating.
Solution 02:
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By following alogarithms we can get the long term debt f each rating levels.Total debt over capitalstudy
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is calculated by taking another ratios by assigning new credit ratings.The total debt component includes the long term debt plus current maturities,commercial paper borrowings and other short term borrowings.The denomina or incl des long via termdebt plus current maturities,commercial paper,and other short term borrowings and other short term borrowings and shareholders equity including
preffered stock plus minority interest.
for each credit rating and its capital ratio can be computed,which comes 42.7%,also the
maximum long term debt to capital for BBB rating ere 534.83 million.
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RATING AAA AA A BBB BB B
Total Debt/capital 25.9% 33.60 39.7% 47.8% 59.4% 69.5%
flow/total debt
Total Debt 145 324.62 416.26 1208.33 6214.28 9667.87
0.556
.
0.655
Long term debt 110.097 191.93 331.56 534.83 898.74 1362.59
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Solution 03:
For creating values for shareholders debt policy choice must be of tax shielding and
minimizing the cost of capital (WACC method).
to SEC.No proper long term vision to debt and equity proportions I a matter of serious concern.Debt has
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Capital structure has been determined mainly in polaroid case by:winning of patent
infringements with kodak.There has been unsolicited tenders offes from Holdings companies
in form of leveraged recapitalization.
Thus here the capital structure is more a consequence of past benefits and the distribution
policy than result of explicit capital steps managemnt,giving rise to a large debt.
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5.From borrowings what EBIT coverage ratios would result in each 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
was com
the possibility of bankruptcy or default.EBIT in polaroid matter the ratio hould increase when
moving from junk B rated companies to AAA rated companies. Having n EBIT of 89.2 in
1996, Polaroid’s EBIT coverage ratio is 7.1 category.
.
earnings before interest and taxes the enterprise will generate and to the evoluti n fthe cost of debt for each category.
The EBIT coverage ratio for Polaroid in each credit rating category is very sensitive to the future
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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.
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SPECIFIC RECOMMENDATIONS AND IMPLEMENTATION:
As per our group recommendation Polaroid must seek for improvement of investment rating
com to A.The
was .
debt and equity in this situation will be better as of in BBB grading,reaping a benefits to the
shareholders.
The WAAC and capital structure even in long unseen circumstances ill continue the operations with
minor profits.
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