Polaroid – Case Brief
Team 3 – Tanvi Samdani / Lu Chen / Anastasia Sutjahjo / Yizhou Zhang
1. What are the main objectives of the debt policy that Ralph Norwood must recommend
to Polaroid’s board of directors?
The new debt or equity raised would be used to support the aggressive development and
expansion of the firm. Due to increased competition and consumer preference shift, the
firm has operated at loss. Therefore one of the objectives is to prevent the firm to carry on
too much debt and get into financial distress. The second objective is to maximize the
advantage of tax shield and maximize the value added to stakeholders by borrowing debt.
At the same time, Norwood wants to retain the firm’s current bond-rating of BBB, which is
at investment-grade and would be costly if the firm were downgraded. The debt policy
should be able to push the firm’s cost of capital to the minimum rate possible, while also
gives the firm enough financial flexibility to meet future adversities.
2. What financing requirements do you foresee for the firm in the coming years? What are
the risks associated with Polaroid’s business and strategy? In your view, what firms are
Polaroid’s peer firms?
Financial requirements: There are three main categories that the firm needs financing. First
one is the increase in net working capital. Based on the forecast given by the case, even
though 1996 working capital decreased by $11 million from 1995, the following four years
see an increase pattern, $42, $53, $56, and $70 million respectively. In addition, the firm
needs financing for its capital expenditures of $140 million annually for the projected five
years. Lastly, cash dividends and share repurchase will also need financing. The firm will
spend $27 million in cash dividend and about $20 to $60 million on share repurchase
program per year.
Risks: Financial risk
Market risks: Although the outlook for interest rates is stable as mentioned in the case, the
Fed may lift interest rate if there is sign of inflation. As by 1995 half of the firm’s revenue
is from international market, the firm’s earnings are greatly subject to fluctuations in
foreign exchange rates. Credit risk: The firm also faces counterparty risks as the firm relies
on suppliers for raw materials while accounts receivable counts for 25% of total assets for
1994 and 1995.
Strategic risk: The firm’s new CEO is characterized as an “energetic leader,” who has big
plans for the firm’s restructure and future development. The firm just cut 20% of its
