PolaroidIn March 1996, Ralph Norwood, treasurer of Polaroid Corporation, was asked to review investment bankers' refinancing proposals for a $150 million debt due in January 1997. Gary DiCamillo, newly appointed CEO of the company, in response to the company's lagging stock price, had outlined a new plan to aggressively leverage the existing Polaroid brand, introduce product extensions and penetrate new emerging markets. Before Norwood can choose a refinancing proposal, it must consider the financing needs of DiCamillo's new business strategy and the capital structure that would provide the lowest cost of capital and the greatest financial flexibility. Norwood also had to consider the maturity structure of the debt. COMPANY PROFILE Nature of Product Polaroid Corporation is primarily engaged in the design, manufacture and sale of instant photographic imaging products worldwide. Since 1948, this mission led them to develop black and white instant film in 1954, instant color film in 1960, and the SX-70 camera in 1972 which no longer required users to coat the developing image. However, most of the revenue generated by the instant photography market did not come from the sale of cameras. Cameras were often sold at low margins to encourage film sales. By increasing the number of instant camera users, the company increased its sales of files, its main margin product. However, the advent of digital photography in the 1990s threatened to erode Polaroid's instant camera user base. Demand for Instant Photographic Services In the consumer market, demand for film on newly purchased cameras tended to be highest and then decline in somewhat predictable patterns. The demand for films is therefore often correlated with camera sales. In the commercial market, demand came from instant photography for identification purposes such as ID badges, as well as various applications in medicine and law enforcement. In the United States, the market for instant film photography had reached maturity. Sales in 1994 and 1995 had fallen by 2 percent and 12 percent, respectively. International sales, on the other hand, offer strong growth potential. With rising standards of living and a lack of infrastructure to process 35mm film in many emerging countries, there was a large untapped market for instant photography. Polaroid cameras were in high demand. Growth in int...... middle of paper ...... completed, the company's EBIT coverage ratio would move downward. If Norwood were to reduce the company's debt requirement to less than $690.47, Polaroid would maintain its investment grade status. bond rating and benefit not only from a lower cost of debt, but also from a lower cost of total capital, as shown in Appendix B. Additionally, Polaroid's EBIT would remain above 2 over the Next 5 years. Norwood could also increase the bond rating. to A if it reduced the required debt amount to $574.47 million. At this debt level, the company's EBIT coverage ratio would increase even further and remain above 4 over the next 5 years. Yet reducing the amount of debt used would also increase the company's WACC. RECOMMENDATIONS Norwood should elect to maintain the company's current bond rating of BBB...