company's WACC over the next five years (See Appendix B). Moreover, 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.RECOMMENDATIONSNorwood 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....
