maintain their financial flexibility so as not to lose their investment-grade bond rating. The firm also continued the steady stock repurchase program it had begun in the late 1980s in order to stave off a takeover threat.PROBLEM DEFINITIONThe topical problem facing Polaroid in late March of 1996 was that virtually all of the firm's debt was due within six years. Consequently all the company's borrowing would need to be repaid or refinanced in a relatively short amount of time. However, the company's treasurer, Ralph Norwood, needed to consider the company's optimum mix of capital in light of the new CEO's objectives before he could refinance the company's current debt. Specifically, what mix of debt to equity would yield the lowest cost of capital? How would this mix effect the company's bond rating? Currently, Polaroid had a Standard and Poor's rating of BBB, the lowest rating of investment-grade debt. Norwood needed to maintain the company's investment-grade rating due to the higher cost of issuing non-investment-grade debt. Moreover, a lower bond rating could have negative repercussions of Polaroid brand equity.ANALYSISAccording to exhibit 6, the sum of Polaroid's long term and short term debt requirements over the next five years is $726.8 million. However, Norwood needed to chose a target bond rating that would provide the lowest possible cost of capital and the most possible flexibility. Appendix A shows the maximum debt allowed for Polaroid under each bond rating. The firgures were derived by taking the maiximum debt to capitalization ratio for each rating in exhibit 9 and multiplying it by the company's book vaue of capital. As the chart shows, if the company maintains its current debt requirement it would not be able to maintain its investment-grade bond rating. The maximum allowable debt for Polaroid is $690.47. The company's debt rating would drop to BB. The decrease in bond rating would in turn cause an upward shift in the...
