You are on page 1of 14

UVA-S-F-1181.

XLS

This spreadsheet supports STUDENT analysis of


the case, "Polaroid Corporation, 1996" (UVA -F1181, v. 1.7 ).
Please note:
This is a working model. Assumptions / Inputs
presented can be changed to vary the results.
Please press F9 to recalculate results after
changing assumptions.
This model contains an intentional circularity. To
resolve this circularity, please set Excel to
recalculate the model a number of times (20 to 50).
See TOOLS/OPTIONS/CALCULATION, and check
ITERATION.

Revised, December 10, 2001.


Copyright (C) 1998, by the University of Virginia Darden School Foundation.

Exh. 1

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

$1,019.0
1,217.9
2,236.9
2,147.7
89.2
247.0
52.1
-140.2

$1,160.3
1,152.2
2,312.5
2,112.2
200.3
0.0
46.6
117.2

$1,178.8
1,066.1
2,244.9
2,059.5
185.4
44.0
47.9
-51.3

$1,145.7
1,006.6
2,152.3
1,938.5
213.8
0.0
58.5
99.0

$1,113.6
957.0
2,070.6
1,824.0
246.6
0.0
58.4
683.7

$1,058.3
913.4
1,971.7
1,687.4
284.3
0.0
81.3
151.0

$1,091.8
812.9
1,904.7
1,600.5
304.2
40.5
86.2
145.0

$1,048.3
814.6
1,862.9
1,689.1
173.8
151.9
29.0
-22.6

$1,009.3
754.6
1,763.9
1,610.1
153.8
0.0
15.0
125.2

$964.3
664.9
1,629.2
1,493.5
135.7
0.0
18.6
108.2

Common Shares, End of Year (000s)


Common Shares Repurchased (000s)
Repurchase Outlay ($ millions)
Common Shares Issued (000s)

45,533
1,218
$40.2
753

45,998
941
$30.6
133

46,806
0
$0.0
138

46,668
2,258
$63.4
7

48,919
1,151
$30.6
0

50,070
2,040
$55.6
0

52,110
19,525
$950.6
0

71,635
0
$0.0
9,717

61,918
0
$0.0
0

61,918
0
$0.0
0

Earnings Per Share


Dividend Per Share

-$3.09
$0.60

$2.49
$0.60

-$1.10
$0.60

$2.06
$0.60

$12.54
$0.60

$2.20
$0.60

$1.96
$0.60

-$0.34
$0.60

$2.02
$0.60

$1.75
$0.50

Selected Balance Sheet Information


Working Capital
Net Property, Plant & Equipment
Total Assets
Long-Term Debt
Redeemable Preferred Stock
Common Stockholders' Equity

$738.5
691.0
2,261.8
526.7
0.0
717.7

$886.8
747.3
2,316.7
566.0
0.0
864.4

$833.6
718.2
2,212.3
602.3
0.0
767.3

$789.0
657.3
2,008.1
637.4
0.0
808.9

$695.3
549.4
1,889.3
471.8
0.0
772.9

$609.1
461.0
1,701.3
513.8
348.6
207.7

$642.0
430.9
1,776.7
602.2
321.9
148.8

$980.0
433.8
1,957.2
402.3
0.0
1,011.5

$652.6
359.6
1,599.4
0.0
0.0
1,048.2

$602.4
357.7
1,444.6
0.0
0.0
960.1

Addns. to Property Plant and Equip.


Depreciation
Book Value LT Debt/Capital
Market Value LT Debt/Capital

167.9
$132.7
42.3%
19.6%

146.7
$118.2
39.6%
27.5%

165.6
$100.3
44.0%
27.8%

201.5
$89.1
44.1%
30.5%

175.8
$85.5
37.9%
26.6%

120.9
$87.2
48.0%
25.3%

94.5
$87.4
56.1%
28.5%

127.0
$81.9
28.5%
23.4%

116.6
$75.7
0.0%
0.0%

82.9
$71.2
0.0%
0.0%

Selected Valuation Information (at years' ends)


Polaroid Stock Price
$47.38
S&P 500 Index
615.93
Polaroid Average P/E (1)
12.1
S&P Industrials Average P/E (1)
15.2
Polaroid Market/Book Ratio
3.01
Polaroid Beta
1.05
Yield on 30-Year T-Bonds
6.88%
Yield on 90-day T-Bills
5.49%
Total Annual Return on Large Co. Stocks
33.00%

$32.50
459.27
13.3
15.5
1.73
1.05
7.37%
4.25%
1.30%

$33.50
466.25
15.6
18.4
2.04
1.15
6.59%
3.00%
9.90%

$31.13
435.71
14.2
19.8
1.80
1.15
7.67%
3.43%
7.67%

$26.63
417.09
12.2
19
1.69
1.20
8.14%
5.38%
30.55%

$23.38
330.22
15.6
14.4
5.63
1.25
8.61%
7.50%
-3.17%

$22.88
353.40
21.8
12.6
8.01
1.25
8.45%
8.11%
31.49%

$18.38
277.72
NMF
10.8
1.30
1.25
8.96%
6.67%
18.81%

$11.88
247.08
14.7
15.3
0.70
1.20
8.59%
5.78%
5.23%

$33.25
242.17
16.6
17.5
2.14
1.10
7.80%
5.97%
18.47%

Selected Income Statement Information


Net Sales
U.S.
International
Total
Operating Expenses
Profit from Opns. Before Restructuring Exp.
Restructuring Expense
Interest Expense
Net Earnings

Notes:

1. P/E ratios are computed on earnings before restructuring charges, litigation award, and other extraordinary items.

Page 2

Exh. 3

Exhibit 3
Consolidated Statement of Earnings
(In $ millions)
Years ended December 31,
1995
1994
Net Sales
United States
International
Total Net Sales
Cost of Goods Sold
Marketing, Research, & Admin.
Restructuring & Other.
Total Costs
Profit/(Loss) from Operations
Interest Income
Other Income
Interest Expense
Earnings/(Loss) Before Taxes
Tax Expense
Net Earnings/(Loss)

$1,019.0
1,217.9
2,236.9

$1,160.3
1,152.2
2,312.5

1,298.6
849.1
247.0
2,394.7
-157.8

1,324.2
788.0
0.0
2,122.2
200.3

8.7
-0.2
52.1
-201.4
-61.2
-140.2

9.7
-2.7
46.6
160.7
43.5
117.2

Page 3

Exh. 4

Exhibit 4
Consolidated Balance Sheet
(In $ millions)

Assets
Current Assets
Cash and Cash Equivalents
Short-Term Investments
Receivables, less allowances
Inventories
Prepaid Expenses and Other
Total Current Assets
Gross Property Plant and Equipment
Less Accumulated Depreciation
Net Property, Plant and Equipment
Prepaid Taxes -- non-current
Total Assets
Liabilities and Stockholders' Equity
Current Liabilities
Short-Term Debt
Current Portion of Long-Term Debt
Payables and Acrruals
Compensation & Benefits
Taxes Payable
Total Current Liabilities
Long-Term Debt
Accrued Postretirement Benefits
Accrued Postemployment Benefits
Total Liabilities
Preferred Stock
Common Stockholders' Equity
Common Stock (1)
Additional Paid-In Capital
Retained Earnings
Less Treasury Stock, at Cost
Less Deferred Compensation
Total Common Stockholders Equity
Total Liabilities and Stockholders' Equity

1995

1994

$73.3
9.8
550.4
615.5
208.5
1,457.5

$143.3
85.6
541.0
577.4
141.4
1,488.7

2,164.4

2,043.4

1,473.4
691.0
113.3
$2,261.8

1,296.1
747.3
80.7
$2,316.7

$160.4
39.7
274.9
197.4
46.6
719.0
526.7
257.2
41.2
1,544.1
0.0

$117.1
35.9
275.7
121.4
51.8
601.9
566.0
247.2
37.2
1,452.3
0.0

75.4
401.9
1,525.8
1,205.4
80.0
717.7
$2,261.8

75.4
387.2
1,692.1
1,174.5
115.8
864.4
$2,316.7

Page 4

Exh. 6

Exhibit 6
Financial Forecast, 1996-2000
Actual
1995
-3.2%
4.0%

Annual Increase in Sales


Opng. Profit/Sales
Tax Rate
Wkg. Capital/Sales
Income Statement
Net Sales
Operating Profit
Interest Income
Interest Expense
Pre-Tax Income
Tax Expense
Net Income
Dividends
Retentions to Earnings
Balance Sheet
Cash
Working Capital (without debt)
Prepaid Tax
Net Fixed Assets
Total Assets
Debt (long and short term)
Other Long-Term Liabilities
Stockholders' Equity
Total Liabilities & Stockholders' Equity

1996
2.0%
8.0%
40.0%
37.0%

1997
5.0%
9.5%

Projected
1998
6.0%
10.0%

1999
6.0%
10.0%

$2,236.9 $2,281.6 $2,395.7 $2,539.5 $2,691.8


89.2
182.5
227.6
253.9
269.2
8.5
5.0
5.0
5.0
5.0
-52.1
(52.1)
(52.1)
(52.1)
(52.1)
45.6
135.4
180.5
206.8
222.1
-61.2
(54.2)
(72.2)
(82.7)
(88.8)
-15.6
81.3
108.3
124.1
133.2
27.3
27.3
27.3
27.3
27.3
$ (42.9) $ 53.9 $ 81.0 $ 96.8 $ 105.9

83.1
855.5
113.3
691.0
1,742.9

$ 148.3
844.2
113.3
691.0
1,796.8

$ 187.1
886.4
113.3
691.0
1,877.8

$ 230.7
939.6
113.3
691.0
1,974.6

$ 280.3
996.0
113.3
691.0
2,080.5

726.8
298.4
717.7
$1,742.9

726.8
298.4
771.6
$1,796.8

726.8
298.4
852.6
$1,877.8

726.8
298.4
949.4
$1,974.6

726.8
298.4
1,055.3
$2,080.5

Free Cash Flows


EBIT
Less Taxes on EBIT
Plus Depreciation
Less Capital Expenditures
Less Additions/plus Reductions in Wkg. Cap.
Free Cash Flow

$ 182.5 $ 227.6 $ 253.9 $


(73.0)
(91.0)
(101.6)
140.0
140.0
140.0
(140.0)
(140.0)
(140.0)
11.3
(42.2)
(53.2)
$ 120.8 $ 94.3 $ 99.2 $

Page 5

269.2
(107.7)
140.0
(140.0)
(56.4)
105.1

Exh. 6

2000
7.0%
10.0%

$2,880.3
288.0
5.0
(52.1)
240.9
(96.4)
144.6
27.3
$ 117.2

$ 327.8
1,065.7
113.3
691.0
2,197.8
726.8
298.4
1,172.6
$2,197.8

$ 288.0
(115.2)
140.0
(140.0)
(69.7)
$ 103.1

Page 6

Exh. 9

Exhibit 9
Key Industrial Financial Ratios
Three-Year Medians (1993-1995)
AAA
13.50
17.08
98.20%
60.00%
29.30%
22.60%
13.30%
25.90%

Pretax interest coverage (x)


EBITDA Interest coverage (x)
Funds from operations/total debt (%)
Free operating cash flow/total debt (%)
Pretax return on permanent capital (%)
Operating income/sales (%)
Long-term debt/capital (%)
Total debt/capitalization incl. short-term debt (%)
Source: Standard & Poor's CreditWeek October 30, 1996, page 26.

Page 7

AA
9.67
12.80
69.10%
26.80%
21.40%
17.80%
21.10%
33.60%

A
5.76
8.18
45.50%
20.90%
19.10%
15.70%
31.60%
39.70%

BBB
3.94
6.00
33.30%
7.20%
13.90%
13.50%
42.70%
47.80%

BB
2.14
3.49
17.70%
1.40%
12.00%
13.50%
55.60%
59.40%

Exh. 9

B
1.17
2.16
12.80%
-0.90%
9.00%
12.30%
65.50%
69.50%

Page 8

Analysis of Flexibi

1 Pre-tax Cost of Debt (Exh. 12)


Required for rating category:
2 Book Value Debt/Capital (Book) (Exh. 9)
3 Market/Book Value of Equity Ratio (Exh. 1)
4 Market Value Debt/Capital

5
6
7
8
9

10
11
12
13
14

Estimate of Unused Debt Capacity


Polaroid Enterprise Value (1)
Mkt Value of Polaroid's Existing Debt (1)
Maximum Debt Implied by Rating (2)
Unused Debt Capacity at current rating
Unused Debt Capacity until InvestmentGrade Rating is lost (at BB)
Estimate of Interest Coverage
Interest Expense (3)
Normalized 5-Year EBIT (4)
Downside EBIT
Coverage Ratio, Normalized EBIT
Coverage Ratio, Downside EBIT

AAA
6.70%

AA
6.90%

A
7.00%

25.90%
3.01
10.40%

33.60%
3.01
14.39%

39.70%
3.01
17.95%

2,883.93
726.80
300.05
426.75
643.23

2,883.93
726.80
415.05
311.75
528.23

2,883.93
726.80
517.59
209.21
425.69

20.10
244.26
150.00
12.15
7.46

28.64
244.26
150.00
8.53
5.24

36.23
244.26
150.00
6.74
4.14

Analysis of Flexibility by Rating Category

BBB
7.40%

BB
9.00%

B
10.60%

47.80%
3.01
23.33%

59.40%
3.01
32.71%

69.50%
3.01
43.09%

2,883.93
726.80
672.70
54.10
270.58

2,883.93
726.80
943.28
216.48
0.00

2,883.93
726.80
1,242.57
515.77
299.29

49.78
244.26
150.00
4.91
3.01

84.90
244.26
150.00
2.88
1.77

131.71
244.26
150.00
1.85
1.14

Valuation Analysis

Valuation Analysis
Free Cash Flow (from case Exhibit 6)
Terminal Value (Note 1)
Total FCF
DCF at 10%
Less Debt
Equity
Shares outstanding
Intrinsic Value Per Share
Recent Share Price
Premium of Price vs. Value

2,094.54
-726.8
1,367.74
46
30.04
47.375
58%

1996

1997

Projected
1998

$120.8

$94.3

$99.2

$120.8

$94.3

$99.2

1999

2000

$105.1

$103.1
2,732.1
$2,835.2

$105.1

WACC =
G=

10%
6%

Capital Costs by Rating Category

AAA
Cost of Debt (pre-tax)
Cost of Equity

6.70%
10.25%

Approach Based on Hudson Guaranty Estimates of Equity Costs


Cost of Debt (after 40% tax)
Cost of Equity
Market/Book Ratio (Exh. 1)
Debt/Capital (Book) (Exh. 9)
Debt/Capital (Market)
Weight of Debt
Weight of Equity

4.02%
10.25%
25.90%
10.40%

WACC (using Mkt. Wts.)


WACC (using Book Wts.)

9.60%

Alternative Approach Based on CAPM and Levered Beta


AAA
Cost of Debt (pre-tax)
Unlevered Beta
Debt/Equity (Market)
Relevered Beta
Cost of Equity (Rf=.0624, EMRP=.054)

6.70%
0.87
11.61%
0.93
11.29%

Cost of Debt (after 40% tax)


Cost of Equity
Market/Book Ratio (Exh. 1)
Debt/Capital (Book) (Exh. 9)
Debt/Capital (Market)
Weight of Debt
Weight of Equity

4.02%
11.29%
25.90%
10.40%
0.10
0.90

WACC (using Mkt. Wts.)


WACC (using Book Wts.)

Note: Estimation of Polaroid's Unlevered Beta:


Long-term Debt
Short-term Debt
Total Debt
Mkt. Value of Equity
Debt/Capital (market)
Debt/ Equity (market)

10.53%

566.4
160.4
726.8
2157
0.25
0.34

AA
6.90%
10.30%

A
7.00%
10.40%

BBB
7.40%
10.50%

BB
9.00%
11.75%

B
10.60%
13.00%

4.14%
10.30%

4.20%
10.40%

4.44%
10.50%

5.40%
11.75%

6.36%
13.00%

33.60%
14.39%

39.70%
17.95%

47.80%
23.33%

59.40%
32.71%

69.50%
43.09%

AA
6.90%
0.87
16.81%
0.96
11.43%

A
7.00%
0.87
21.87%
0.99
11.58%

BBB
7.40%
0.87
30.42%
1.03
11.82%

BB
9.00%
0.87
48.61%
1.13
12.33%

B
10.60%
0.87
75.70%
1.27
13.10%

4.14%
11.43%

4.20%
11.58%

4.44%
11.82%

5.40%
12.33%

6.36%
13.10%

33.60%
14.39%
0.14
0.86

39.70%
17.95%
0.18
0.82

47.80%
23.33%
0.23
0.77

59.40%
32.71%
0.33
0.67

69.50%
43.09%
0.43
0.57

10.38%

10.25%

10.10%

10.06%

10.20%

Levered Beta
Tax Rate
Unlevered Beta

1.05
0.40
0.87