Polaroid Essay examples -- GCSE Business Marketing Coursework

Polaroid In March 1996, Ralph Norwood, treasurer of Polaroid Corporation, was asked to consider refinancing proposals from investment bankers of $150 million of debt due to mature in January 1997. Gary DiCamillo, newly appointed CEO of the firm,in reaction to the company's lagging share price, had set forth a new plan to agressively expoit the existing Polaroid brand, introduce product extensions, and enter new emerging markets. Before Norwood can choose a refinancing proposal, he must consider the funding needs of DiCamillo's new corporate strategy and the capital structure which would provide the lowest cost of capital and most financial flexibility. Norwood also needed to consider the maturity structure of debt. COMPANY PROFILE Nature of product Polaroid Corporation has been engaged primarily in the business of designing, manufacturing, and selling instant photographic imaging products worldwide. Since 1948, this mission has led them to develop instant black-and-white film in 1954, instant color film in 1960, and the SX-70 camera in 1972 which no longer required users to coat the developing picture. However, most revenues generated from the instant photography market were not through camera sales. Cameras were often sold on low margins to encourage film sales. By increasing the base of instant camera users the company increased file sales, its primary margin product. However, the advent of digital photography in the 1990s threatened to erode Polaroid's base of instant film camera users. Demand for Instant Photographic Services In the consumer market, demand for film on newly purchased cameras tended to be highest and then tappered off to somewhat predictable patterns. Therefore film demand often correlated to camera sales. In the commercial market, demand was derived from instant photography for indentification purposes such as I.D. badges, as well as various applications in medicine and law enforcement. The market for instant film photography in the U.S. had matured. Sales in 1994 and 1995 had fallen 2 percent and 12 percent respectively. International sales, on the other hand, offered strong growth potential. With rising standards of living and no infrastructure to process 35 mm film in many emerging market countries, there was a large untapped market for instant photography. Polaroid's cameras were in high demand. Growth in int... ...over, the company's EBIT coverage ratio would shift downward. If Norwood, were to reduce the company's debt requirement to under $690.47, Polaroid would maintain its investment-grade bond rating and benefit not only from a lower cost of debt, but also from a lower cost of total captial as shown in Appendix B. In addition, Polaroid's EBIT would remain above 2 over the next 5 years. Norwood could also raise the bond rating to A if he were to reduce the required debt amount to $574.47 million. At this level of debt, the company's EBIT coverage ratio would shift upward even more and remain above 4 over the next 5 years. Yet, lowering the amount of debt used would also raise the company's WACC. RECOMMENDATIONS Norwood should choose to maintain the company's current bond rating of BBB. Allowing Polaroid's bond rating to drop to BB could not only cause damage to the firm's brand name, but it would also increase the company's total cost of capital. Polaroids current level of debt financing surpasses the benefits of debt. Although it increases the company's credit worthiness as measured by their EBIT coverage ratio, it also raises their WACC do to the increased risk of default.