8 capital structure decision - polaroid corporation 1996

8/18/2019 8 Capital Structure Decision - Polaroid Corporation 1996

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1995 1994 1993 1992 1991 1990 1989 1988 1987

Selected Income Statement Information

Net Sales - US $1,019.0 $1, 160.3 $1,178.8 $1,145.7 $1,113.6 $1, 058.3 $1,091.8 $1,048.3 $1,009.3

Net Sales - International 1,217.9 1,152.2 1,066.1 1,006.6 957.0 913.4 812.9 814.6 754.6

Net Sales - Total 2,236.9 2,312.5 2,244.9 2,152.3 2,070.6 1,971.7 1,904.7 1,862.9 1,763.9

Operating Expenses 2,147.7 2,112.2 2,059.5 1,938.5 1,824.0 1,687.4 1,600.5 1,689.1 1,610.1

Profit from Opns. Before Restructuring Ex p. 89.2 200.3 185.4 213. 8 246.6 284.3 304.2 173. 8 153.8

Restructuring Expense 247.0 0.0 44.0 0.0 0.0 0.0 40.5 151.9 0.0

Interest Expense 52.1 46.6 47.9 58.5 58.4 81.3 86.2 29.0 15.0

Net Earnings -140.2 117.2 -51.3 99.0 683.7 151.0 145.0 -22.6 125.2

Common Shares , End of Year (000s ) 45,533 45,998 46,806 46,668 48,919 50,070 52,110 71,635 61,918

Common Shares Repurchased (000s) 1,218 941 0 2,258 1,151 2,040 19,525 0 0

Repurchase Outlay ($ millions) $40.2 $30.6 $0.0 $63.4 $30.6 $55.6 $950.6 $0.0 $0.0Common Shares Issued (000s) 753 133 138 7 0 0 0 9,717 0

Earnings Per Share -$3.09 $2.49 -$1.10 $2.06 $12.54 $2.20 $1.96 -$0.34 $2.02

Dividend Per Share $0.60 $0.60 $0.60 $0.60 $0.60 $0.60 $0.60 $0.60 $0.60

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1995 1994 1993 1992 1991 1990 1989 1988 1987

Selected Balance Sheet Information

Working Capital $738.5 $886.8 $833.6 $789.0 $695.3 $609.1 $642.0 $980.0 $652.6

Net Property, Plant & Equipment 691.0 747.3 718.2 657.3 549.4 461.0 430.9 433.8 359.6

Total Assets 2,261.8 2,316.7 2,212.3 2,008.1 1,889.3 1,701.3 1,776.7 1,957.2 1,599.4Long-Term Debt 526.7 566.0 602.3 637.4 471.8 513.8 602.2 402.3 0.0

Redeemable Preferred Stock 0.0 0.0 0.0 0.0 0.0 348.6 321.9 0.0 0.0

Common Stockholders' Equity 717.7 864.4 767.3 808.9 772.9 207.7 148.8 1,011.5 1,048.2

Addns. to Property Plant and Equip. 167.9 146.7 165.6 201.5 175.8 120.9 94.5 127.0 116.6

Depreciation $132.7 $118.2 $100.3 $89.1 $85.5 $87.2 $87.4 $81.9 $75.7Book Value LT Debt/Capital 42.3% 39.6% 44.0% 44.1% 37.9% 48.0% 56.1% 28.5% 0.0%

Market Value LT Debt/Capital 19.6% 27.5% 27.8% 30.5% 26.6% 25.3% 28.5% 23.4% 0.0%

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1995 1994 1993 1992 1991 1990 1989 1988 1987

Selected Valuation Information (at years' ends)

Polaroid Stock Price $47.38 $32.50 $33.50 $31.13 $26.63 $23.38 $22.88 $18.38 $11.88

S&P 500 Index 615.93 459.27 466.25 435.71 417.09 330.22 353.40 277.72 247.08

Polaroid Average P/E (1) 12.1 13.3 15.6 14.2 12.2 15.6 21.8 NMF 14.7S&P Industrials Average P/E (1) 15.2 15.5 18.4 19.8 19 14.4 12.6 10.8 15.3

Polaroid Market/Book Ratio 3.01 1.73 2.04 1.80 1.69 5.63 8.01 1.30 0.70

Polaroid Beta 1.05 1.05 1.15 1.15 1.20 1.25 1.25 1.25 1.20

Yield on 30-Year T-Bonds 6.88% 7.37% 6.59% 7.67% 8.14% 8.61% 8.45% 8.96% 8.59%Yield on 90-day T-Bills 5.49% 4.25% 3.00% 3.43% 5.38% 7.50% 8.11% 6.67% 5.78%

Total Annual Return on Large Co. Stocks 33.00% 1.30% 9.90% 7.67% 30.55% -3.17% 31.49% 18.81% 5.23%

8


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Net Sales

United States $1,019.0 $1,160.3 46 50

International 1,217.9 1,152.2 54 50

Total Net Sales 2,236.9 2,312.5 100 100

Cost of Goods Sold 1,298.6 1,324.2 58 57Marketing, Research, & Admin. 849.1 788.0 38 34

Restructuring & Other. 247.0 0.0 11 0

Total Costs 2,394.7 2,122.2 107 92

Profit/(Loss) from Operations -157.8 200.3 -7 9

Interest Income 8.7 9.7 0 0

Other Income -0.2 -2.7 0 0

Interest Expense 52.1 46.6 2 2

Earnings/(Loss) Before Taxes -201.4 160.7 -9 7

Tax Expense -61.2 43.5 -3 2

Net Earnings/(Loss) -140.2 117.2 -6 5I


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1995 1994 1995 1994

Assets

Current Assets

Cash and Cash Equivalents $73.3 $143.3 3 6

Short-Term Investments 9.8 85.6 0 4

Receivables, less allowances 550.4 541.0 24 23

Inventories 615.5 577.4 27 25

Prepaid Expenses and Other 208.5 141.4 9 6

Total Current Assets 1,457.5 1,488.7 64 64

Gross Property Plant and Equipment 2,164.4 2,043.4 96 88

Less Accumulated Depreciation 1,473.4 1,296.1 65 56Net Property, Plant and Equipment 691.0 747.3 31 32

Prepaid Taxes -- non-current 113.3 80.7 5 3

Total Assets $2,261.8 $2,316.7 100 100L


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Liabilities and Stockholders' Equity

Current Liabilities

Short-Term Debt $160.4 $117.1 7 5

Current Portion of Long-Term Debt 39.7 35.9 2 2

Payables and Acrruals 274.9 275.7 12 12

Compensation & Benefits 197.4 121.4 9 5

Taxes Payable 46.6 51.8 2 2

Total Current Liabilities 719.0 601.9 32 26

Long-Term Debt 526.7 566.0 23 24

Accrued Pos tretirement Benefits 257.2 247.2 11 11

Accrued Pos temployment Benefits 41.2 37.2 2 2

Total Liabilities 1,544.1 1,452.3 68 63

Preferred Stock 0.0 0.0 0 0

Common Stockholders' Equity 0 0

Common Stock (1) 75.4 75.4 3 3

Additional Paid-In Capital 401.9 387.2 18 17 Retained Earnings 1,525.8 1,692.1 67 73

Less Treasury Stock, at Cost 1,205.4 1,174.5 53 51

Less Deferred Compensation 80.0 115.8 4 5

Total Common Stockholders Equity 717.7 864.4 32 37

Total Liabilities and Stockholders' Equity $2,261.8 $2,316.7 100 1007


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Actual

1995 1996 1997 1998 1999 2000

Annual Increase in Sales -3.2% 2.0% 5.0% 6.0% 6.0% 7.0%

Opng. Profit/Sales 4.0% 8.0% 9.5% 10.0% 10.0% 10.0%

Tax Rate 40.0%

Wkg. Capital/Sales 37.0%

Dividend Payout Ratio 25.0%Income Statement

Net Sales 2,236.9$ 2,281.6$ 2,395.7$ 2,539.5$ 2,691.8$ 2,880.3$

Operating Profit 89.2 182.5 227.6 253.9 269.2 288.0

Interest Income 8.5 5.0 5.0 5.0 5.0 5.0

Interest Expense -52.1 (52.1) (52.1) (52.1) (52.1) (52.1)

Pre-Tax Income 45.6 135.4 180.5 206.8 222.1 240.9 Tax Expense -61.2 (54.2) (72.2) (82.7) (88.8) (96.4)

Net Income -15.6 81.3 108.3 124.1 133.2 144.6

Dividends 27.3 27.3 27.3 27.3 27.3 27.3

Retentions to Earnings (42.9)$ 53.9$ 81.0$ 96.8$ 105.9$ 117.2$

Projected

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Actual

1995 1996 1997 1998 1999 2000

Balance Sheet

Cash 83.1$ 148.3$ 187.1$ 230.7$ 280.3$ 327.8$

Working Capital (without debt) 855.5 844.2 886.4 939.6 996.0 1,065.7 Prepaid Tax 113.3 113.3 113.3 113.3 113.3 113.3

Net Fixed Assets 691.0 691.0 691.0 691.0 691.0 691.0

Total Assets 1,742.9 1,796.8 1,877.8 1,974.6 2,080.5 2,197.8

Debt (long and short term) 726.8 726.8 726.8 726.8 726.8 726.8 Postretirement Benefits 298.4 298.4 298.4 298.4 298.4 298.4

Equity 717.7 771.6 852.6 949.4 1,055.3 1,172.6

Total Capital 1,742.9$ 1,796.8$ 1,877.8$ 1,974.6$ 2,080.5$ 2,197.8$

Projected

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Actual

1995 1996 1997 1998 1999 2000

Free Cash Flows

EBIT 182.5$ 227.6$ 253.9$ 269.2$ 288.0$Less Taxes on EBIT (73.0) (91.0) (101.6) (107.7) (115.2)

Plus Depreciation 140.0 140.0 140.0 140.0 140.0

Less Capital Expenditures (140.0) (140.0) (140.0) (140.0) (140.0)

Less Additions to/plus Reductions in Wkg. Cap. 11.3 (42.2) (53.2) (56.4) (69.7)

Free Cash Flow 120.8$ 94.3$ 99.2$ 105.1$ 103.1$

Projected

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W"&*,1996 1997 1998 1999 2000

Free Cash Flow 120.8 94.3 99.2 105.1 103.1 Ex. 6

WACC 10% 10% 10% 10% 10% Assumed

Terminal Growth rate 6% Assumed

Terminal Value 2732.15

Total Free Cash Flow 120.8 94.3 99.2 105.1 2835.25

PV of FCF 110 78 75 72 1,760

DCF 2,095

Less: Debt 726.8

Equity Value 1,368Outstanding Shares 45.5

Intrinsic Value per Share 30.06

Recent Share Price 47.38

Premium of Price vs. Value 37%

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WACC (Market Weights) - Hudson 9.60% 9.41% 9.28% 9.08% 9.67% 10.13%WACC (Market Weights) - CAPM 10.58% 10.43% 10.30% 10.14% 10.11% 10.24%

DCF - Hudson 2,322 2,448 2,540 2,705 2,278 2,030

DCF - CAPM 1,837 1,896 1,952 2,025 2,040 1,979

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Aaa Best Qualitysmallest degree of

investment riskGilt edge

Stable interest protection

margin

Secure

Principal

AaHighy quality by all

standardsHigh grade bonds

Margins of protection may not be

as large as in Aaa

LT risks larger than Aaa

bond

AMany favourable

investment attributes

Upper medium grade

obligations

Adequate secutity to interest and

principal

Susceptibility to

impairment in future

Baa Medium grade obligations

Neither highly protected

nor poorly secured

Inadequate secuirty for interest and

principal

Lack outstanding

investment character

Have

speculative

character as

well

Ba Have speculative elementsFuture cannot be

considered well assured

Moderate protection of Interest and

principalUncertianity of position

BLack characters of the

desirable investment

Small assurance of

interest and principal

payments

Caa Poor standing May be in defaultElements of danger with respect to

principal or interest

Ca Speculative to a highdegree

Often in default Have other marked shortcomings

CLowest rated class of

bonds

Having extremely poor

prospects of ever attaining

any real investment

standing

Bond Rating Features

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AAA AA A BBB BB BCost of Debt (pre-tax) 6.70% 6.90% 7.00% 7.40% 9.00% 10.60% Ex. 11

Cost of Equity 10.25% 10.30% 10.40% 10.50% 11.75% 13.00% Ex. 11

Hudson Guaranty's Estimates of Equity Costs

Cost of Debt (after tax of 40%) 4.02% 4.14% 4.20% 4.44% 5.40% 6.36% Estimated

Cost of Equity 10.25% 10.30% 10.40% 10.50% 11.75% 13.00% Ex. 11

Market/Book Ratio 3 3 3 3 3 3 Ex. 1

Debt/Capital (Book) 25.90% 33.60% 39.70% 47.80% 59.40% 69.50% Ex. 9

Debt/Capital (Market) 10% 14% 18% 23% 33% 43% Estimated

Weight of Debt 10% 14% 18% 23% 33% 43%Weight of Equity 90% 86% 82% 77% 67% 57%

WACC (Market Weights) 9.60% 9.41% 9.28% 9.08% 9.67% 10.13% Estimated

WACC (Book Weights) 8.64% 8.23% 7.94% 7.60% 7.98% 8.39% Estimated^^

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AAA AA A BBB BB BCAPM and Levered Betas

Cost of Debt (pre-tax) 6.70% 6.90% 7.00% 7.40% 9.00% 10.60% Ex. 11

Current Levered Beta 1.05

Debt/Equity (Market) 11.65% 16.87% 21.95% 30.52% 48.77% 75.96%

Recent Debt/Capital (Market) ratio 24% 24% 24% 24% 24% 24%

Recent Debt/Equity (Market) ratio 32% 32% 32% 32% 32% 32%

Tax rate 40% 40% 40% 40% 40% 40%Unlevered Beta 0.88 0.88 0.88 0.88 0.88 0.88

Relevered Beta 0.94 0.97 1.00 1.04 1.14 1.29

Cost of Equity (Rf = 6.24%, EMRP = 5.4%) 11.34% 11.49% 11.63% 11.88% 12.40% 13.18%

Cost of Debt (after 40% tax) 4.02% 4.14% 4.20% 4.44% 5.40% 6.36%

Market/Book Ratio 3 3 3 3 3 3

Debt/Capital(Book) 25.90% 33.60% 39.70% 47.80% 59.40% 69.50%

Debt/Capital(Market) 10% 14% 18% 23% 33% 43%

WACC (Market Weights) 10.58% 10.43% 10.30% 10.14% 10.11% 10.24%

WACC (Book Weights) 9.44% 9.02% 8.68% 8.32% 8.24% 8.44%

10-year Treasury Bond Rate 6.24% 6.24% 6.24% 6.24% 6.24% 6.24%

Implied rate of beta for varios ratings 0.74 0.75 0.77 0.79 1.02 1.25 eg. (10.25%- . .

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AAA AA A BBB BB B

Rating Category

C o s t o f E

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Hudson

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Rating Category

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AAA AA A BBB BB B

Required Ratios for Rating Category

Pretax interest coverage (x) 13.50 9.67 5.76 3.94 2.14 1.17 Ex. 9

EBITDA Interest coverage (x) 17.08 12.80 8.18 6.00 3.49 2.16 Ex. 9

Funds from operations/total debt (%) 98% 69% 46% 33% 18% 13% Ex. 9Free operating cash flow/total debt (%) 60% 27% 21% 7% 1% -1% Ex. 9

Pretax return on permanent capital (%) 29% 21% 19% 14% 12% 9% Ex. 9

Operating income/sales (%) 23% 18% 16% 14% 14% 12% Ex. 9

Long-term debt/capital (%) 13% 21% 32% 43% 56% 66% Ex. 9

Total debt/capitalization incl. short-term debt (%) 26% 34% 40% 48% 59% 70% Ex. 9

Market/Book value of equity ratio 3 3 3 3 3 3 Ex. 1

Market Value Debt/Capital 10% 14% 18% 23% 33% 43% EstimatedC6

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AAA AA A BBB BB B

Estimate of Unused Debt Capacity

Long Term Debt 527 527 527 527 527 527 Ex. 4

Short Term Debt 160 160 160 160 160 160 Ex. 4

Current Maturities of Long Term Debt 40 40 40 40 40 40 Ex. 4Total book value of Debt 727 727 727 727 727 727

Market Value of Equity 2,158 2,158 2,158 2,158 2,158 2,158 $47.38*45.

Enterprise Value 2,885 2,885 2,885 2,885 2,885 2,885

Maximum Debt Implied by Rating 301 416 519 675 946 1245 Estimated

Unused Debt Capacity at Current Rating -426 -310 -208 -52 219 518 Estimated

Unused Debt Capaci ty until Investment Grade

Rating is Lost (at BB) 645 529 427 271 0 -300 EstimatedC\

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AAA AA A BBB BB B

Estimate of Interest Coverage

Pretax Cost of Debt 6.73% 6.87% 7.04% 7.40% 9.10% 10.52%

Interest Expense 20 29 37 50 86 131

Normalized 5-year EBIT 244.24 244.24 244.24 244.24 244.24 244.24

Downside EBIT (2 Sigma) 150 150 150 150 150 150

Coverage ratio - Normalized EBIT 12 9 7 5 3 2

Coverage ratio - Downside EBIT 7 5 4 3 2 1

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Debt

Common

Stockholders'

Equity

Current

BV D/C

BV D/C if $300

Million for

Expansion

BV D/C if $300

Million for

Recapitalization

Difference

in BV D/C

1995 526.7 717.7 42.33% 53.53% 87.54% 34.01%

1994 566 864.4 39.57% 50.05% 76.61% 26.56%

1993 602.3 767.3 43.98% 54.04% 84.36% 30.32%

1992 637.4 808.9 44.07% 53.68% 81.78% 28.10%

1991 471.8 772.9 37.90% 49.96% 81.70% 31.73%

1990 513.8 207.7 48.01% 79.67% 193.07% 113.41%

1989 602.2 148.8 56.13% 85.84% 200.04% 114.20%1988 402.3 1011.5 28.46% 40.98% 63.05% 22.08%

1987 0 1048.2 0.00% 22.25% 40.10% 17.84%

1986 0 960.1 0.00% 23.81% 45.45% 21.64%

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8 capital structure decision - polaroid corporation 1996

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