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8/18/2019 8 Capital Structure Decision - Polaroid Corporation 1996
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?(@ A$&&$/0.B
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 $0.60
C
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?(@ A$&&$/0.B
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 $75.7Book Value LT Debt/Capital 42.3% 39.6% 44.0% 44.1% 37.9% 48.0% 56.1% 28.5% 0.0%
Market Value LT Debt/Capital 19.6% 27.5% 27.8% 30.5% 26.6% 25.3% 28.5% 23.4% 0.0%
D
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?(@ A$&&$/0.B
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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E0+/:, (%"%,:,0%1 !/0./&$3"%,3
(%"%,:,0% /F G")0$0H. >$0 @ A$&&$/0.B1995 1994 1995 1994
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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J"&"0+, (K,,% >$0 @ A$&&$/0.B1995 1994 1995 1994
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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9$0"0+$"& 9/),+".% >6778O\]]]B
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
\6
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9$0"0+$"& 9/),+".% >6778O\]]]B
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
GX_ 8
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MV!!
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A//3;’. J/03O["40H -,`0$4/0.
Aaa Best Qualitysmallest degree of
investment riskGilt edge
Stable interest protection
margin
Secure
Principal
AaHighy quality by all
standardsHigh grade bonds
Margins of protection may not be
as large as in Aaa
LT risks larger than Aaa
bond
AMany favourable
investment attributes
Upper medium grade
obligations
Adequate secutity to interest and
principal
Susceptibility to
impairment in future
Baa Medium grade obligations
Neither highly protected
nor poorly secured
Inadequate secuirty for interest and
principal
Lack outstanding
investment character
Have
speculative
character as
well
Ba Have speculative elementsFuture cannot be
considered well assured
Moderate protection of Interest and
principalUncertianity of position
BLack characters of the
desirable investment
Small assurance of
interest and principal
payments
Caa Poor standing May be in defaultElements of danger with respect to
principal or interest
Ca Speculative to a highdegree
Often in default Have other marked shortcomings
CLowest rated class of
bonds
Having extremely poor
prospects of ever attaining
any real investment
standing
Bond Rating Features
\I
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!),3$% ["40H
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^6
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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^^
MV!!0-12 -3
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MV!!
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%- . .
^C
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!/.% /F Ga*$%;
9.00%
9.50%
10.00%
10.50%
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12.00%
12.50%
13.00%
13.50%
AAA AA A BBB BB B
Rating Category
C o s t o f E
q u i t y
CAPM
Hudson
MV!!
9.00%
9.20%
9.40%
9.60%
9.80%
10.00%
10.20%
10.40%
10.60%
10.80%
A A
A
A
A A
B B
B
B
B
Rating Category
C o s t o f
C a p i t a l
CAPM -based WACC
Hudson's WACCs
0-12 -3
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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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Current
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BV D/C if $300
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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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