Introduction
Polaroid is a well known brand. Instant photography field customers rely on Polaroid
Corporation. But recent time the corporation’s condition is not good. In recent years Polaroid’s
share price had traded in a narrow range, reflecting small sales and earnings growth. However, a
new plan to exploit aggressively the existing Polaroid brand, introduce extensions and enter new
emerging markets (such as Russia) had been proposed to spur the firm’s performance. The
popularity of digital imaging is increasing day by day. So it is important for Polaroid Corporation
to improve them in digital imaging sector. In late march 1996, Ralph Norwood is appointed as
treasurer of Polaroid Corporation to concern about the firm’s debt policy that would require his
attention in the coming months. He reflected on the competing goals of value creation, flexibility
and bond rating. His plan would have to afford low costs and continued access to capital under a
variety of operating scenario. He aimed to recommend a financial policy that would balance
these goals and provide guidance to the directors and the financial staff regarding the target mix
of capital and the maturity structure of the corporation’s debt.
Analysis of the Economy
The current situation in the debt markets was favorable as USA economy continued in the fifth
year of economic expansion. The equity markets seemed to be pausing after a phenomenal
advance in prices in 1995. The outlook for interest rate was stable, though any sign of inflation
might cause the Federal Reserve Board to lift interest rates. Major changes in taxes and
regulations were in abeyance, at least until the outcome of the presidential elections to be held in
November 1996.
Analysis of the Industry
1. Supplier Power:
There are only one competitor of Polaroid so that is why supplier already got a
advantage but now competitor also move to digital photography so for this reason
Polaroid face more trouble from supplier not only supplier may also switch because
product become obsolete.
2. Buyer power:
There are many companies in the industry. Polaroid’s strength for instant photography was
unrivaled. So for instant photography buyers did not have better choice rather than Polaroid.
3. Competitive Rivalry:
In international market Fuji was the only competitor of Polaroid. Fuji had a film and instant
camera product marketed in Europe and Japan, but in Japan Polaroid enjoyed a dominant market
share. Polaroid dominant in this industry.
4. Threat of substitutions:
Increasingly the expansion of digital imaging threatened to erode the firm’s base of users as
customers shifted from instant photography to digital solutions.
5. Threat of new entry:
The industry has no barrier for new entry, but it is difficult to enter in a new market where
competition is high. It is not easy for a new corporation to win customers faith immediately.
Analysis of the corporation
SWOT Analysis:
Every corporation has some internal and external factor under which some factor encourage
them and some factor discourage them.
So the Polaroid Corporation has some strengths and weakness which indicate internal factor of
Polaroid and also has some opportunities and threats which indicate external factor of Polaroid.
Internal factors:
Strength:
Polaroid creates a huge brand name.
They have potential workforce.
They still sell their product worldwide.
Weakness:
Heavy new technology start-up cost.
They have old technology.
Polaroid has a single product line.
External factor:
Opportunities:
There is a emerging market for digital camera.
They have a brand name so no need for strong advertisement for new product.
They have already produced camera so they get some technological advantages in digital
photography.
Threats:
Polaroid faces stiff competition from many well-capitalized technology companies, such
as Xerox, 3M and Sony.
Customers are moving from instant to digital technology.
Many new companies come up with digital technology
Ratio Analysis
DU PONT Analysis:
(Profit Margin) × (Total asset turnover) × (Equity Multiplier) = ROE
Year Profit margin Total asset turnover Equity multiplier =ROE
1995 (.69%) 1.28 1.71 (1.51%)
1996 3.56% 1.27 1.68 7.59%
1997 4.52% 1.27 1.63 9.36%
1998 4.88% 1.29 1.58 9.94%
1999 4.95% 1.29 1.54 9.83%
2000 5.02% 1.31 1.49 9.79%
Comment:
Here we see the different types of ratio actual and forecasted. The firm’s current position is very
poor the actual one shows that but it improves gradually the forecasted shows that. If we look at
actual one which tells that firm desperately need some change because their profit margin, basic
earning power and return on asset all this are negative which was terrible for firm. If we look at
the DU PONT system same position here ROE was negative that reflect the firm condition that is
why firm wants to take some measure which reflected in forecasted ratio.
Statement of the Problem
In recent time firm face different types of problem but their main concern is recently matured
$150-million, 7.25 percent note which is due to mature in January 1997. Moreover in recent
years Polaroid’s share price had fall and sales and earnings dropped as well. So that is why they
have taken a new plan to move aggressively the existing Polaroid brand, product extensions and
enter new emerging market so they desperately need fund for recent matured note and new
business plan.
Actually the firm’s facing business and financial both type of risk. As we describe earlier that
Polaroid has a huge brand name, Polaroid instant photograph was unrivaled that was their
strength but recent year their rival come up with digital camera that is why it creates uncertainty
in firm’s projected future return on invested capital. Now the firm gets into a trouble and how to
handle their financial risk because they use borrowed capital which created liabilities on the
share holder.
Alternative Courses Action
Firm can resolve this problem by evaluating different types of alternatives. Alternatives are given
as follows.
Firm can issue bond in the market.
Firm can increase additional paid-in-capital half of their required financing and other
half issue bond.
These are the alternatives we can understand which alternative is viable for firm after evaluating
each of this alternative. Here we evaluate each of these alternatives one by one.
Analysis of First Alternative (Issue New Bond)
Assumption
o If the corporation issue new 200 million worth of bond.
o Sales grow at 6% annually.
o Interest rate on bond at 7.50% annually.
o Cost of goods sold 40% of sales price.
o Corporate tax rate 30%.
o Dividend Grow at 4%.
Income Statement:
Balance Sheet:
Particulars Actual Forecasted Forecasted Forecasted Forecasted forecasted
1995 1996 1997 1998 1999 2000
Current 1457.50 1812.20 2018.54 2280.03 2600.43 2983.72
Asset
Prepaid Tax 113.30 113.30 113.30 113.30 113.30 113.30
Net Fixed 691 691 691 691 691 691
Asset
Total Asset 2261.80 2616.50 2822.84 3084.33 3404.73 3788.02
Total 1544.1 1744.10 1744.10 1744.10 1744.10 1744.10
Liabilities
Common 717.70 872.40 1078.74 1340.23 1660.63 2043.92
Stockholders
Equity
Total 2261.80 2616.50 2822.84 3084.33 3404.73 3788.02
Liabilities &
Stockholders
Equity
Comment:
Here we see the income statement & balance sheet of corporation, here we made a five years
forecast of the firm. We assume here if firm’s issue new 200 million worth of bond and sales
grow at 6% the total scenario will change. If we look at the actual and forecasted huge change
between this two firm incur loss in 1995 that means actual one but forecasted one in 1996 they
profit and gradually it increase. Here firm’s required fund for their recently matured note and
expand their business. So if firm’s issue new bond in the market and collect fund from the
market and properly utilized this fund this way they get a huge benefit in coming year.
Analysis of Second Alternative (Additional Paid-In-Capital Half Of Their Required
Financing And Other Half Issue Bond)
Assumption
o If the corporation issue new 100 million worth of bond.
o Increase additional paid-in-capital 100 million
o Sales grow at 6% annually.
o Interest rate on bond at 7.50% annually.
o Cost of goods sold 40% of sales price.
o Corporate tax rate 30%.
o Dividend Grow at 6%.
Income Statement:
Balance Sheet:
Particulars Actual Forecasted Forecasted Forecasted Forecasted forecasted
1995 1996 1997 1998 1999 2000
Current Asset 1457.50 1797.2 1987.33 2231.95 2534.76 2899.67
Prepaid Tax 113.30 113.30 113.30 113.30 113.30 1130.30
Net Fixed 691 691 691 691 691 691
Asset
Total Asset 2261.80 2601.5 2791.63 3036.25 3339.06 3703.97
Total 1544.1 1644.1 1644.10 1644.10 1644.10 1644.10
Liabilities
Common 717.70 957.4 1147.53 1392.15 1694.96 2059.87
Stockholders’
Equity
Total 2261.80 2601.5 2791.63 3036.25 3339.06 3703.97
Liabilities &
Stockholders’
Equity
Comment:
Here the firms can collect fund from increase their additional paid in capital half of their required
financing and other half issue new bond. Here we also assume that firm require 200 million
additional fund, sales grow at 6% but dividend grow at 6% so here also the total scenario change
from 1995 profit increasing gradually from 1996 and then continue. Here firm’s required fund
for their recently matured note and expand their business. So if they utilized this fund properly
they change the firm condition.
Recommendation
We recommend it is better for the firm to increase additional paid-in-capital half of their required
financing and other half issue bond. After analysis we have found that through this system firm
can generate more profit.