UVA-S-F-1181.

XLS

This spreadsheet supports STUDENT analysis of

the case, "Polaroid Corporation, 1996" (UVA -F-
1181, 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
Selected Income Statement Information
Net Sales U.S. $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 $964.3
International 1,217.9 1,152.2 1,066.1 1,006.6 957.0 913.4 812.9 814.6 754.6 664.9
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 1,629.2
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 1,493.5
Profit from Opns. Before Restructuring Exp. 89.2 200.3 185.4 213.8 246.6 284.3 304.2 173.8 153.8 135.7
Restructuring Expense 247.0 0.0 44.0 0.0 0.0 0.0 40.5 151.9 0.0 0.0
Interest Expense 52.1 46.6 47.9 58.5 58.4 81.3 86.2 29.0 15.0 18.6
Net Earnings -140.2 117.2 -51.3 99.0 683.7 151.0 145.0 -22.6 125.2 108.2

Common Shares, End of Year (000s) 45,533 45,998 46,806 46,668 48,919 50,070 52,110 71,635 61,918 61,918
Common Shares Repurchased (000s) 1,218 941 0 2,258 1,151 2,040 19,525 0 0 0
Repurchase Outlay ($ millions) $40.2 $30.6 $0.0 $63.4 $30.6 $55.6 $950.6 $0.0 $0.0 $0.0
Common Shares Issued (000s) 753 133 138 7 0 0 0 9,717 0 0

Earnings Per Share -$3.09 $2.49 -$1.10 $2.06 $12.54 $2.20 $1.96 -$0.34 $2.02 $1.75
Dividend Per Share $0.60 $0.60 $0.60 $0.60 $0.60 $0.60 $0.60 $0.60 $0.60 $0.50

Selected Balance Sheet Information

Working Capital $738.5 $886.8 $833.6 $789.0 $695.3 $609.1 $642.0 $980.0 $652.6 $602.4
Net Property, Plant & Equipment 691.0 747.3 718.2 657.3 549.4 461.0 430.9 433.8 359.6 357.7
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 1,599.4 1,444.6
Long-Term Debt 526.7 566.0 602.3 637.4 471.8 513.8 602.2 402.3 0.0 0.0
Redeemable Preferred Stock 0.0 0.0 0.0 0.0 0.0 348.6 321.9 0.0 0.0 0.0
Common Stockholders' Equity 717.7 864.4 767.3 808.9 772.9 207.7 148.8 1,011.5 1,048.2 960.1

Addns. to Property Plant and Equip. 167.9 146.7 165.6 201.5 175.8 120.9 94.5 127.0 116.6 82.9
Depreciation $132.7 $118.2 $100.3 $89.1 $85.5 $87.2 $87.4 $81.9 $75.7 $71.2
Book Value LT Debt/Capital 42.3% 39.6% 44.0% 44.1% 37.9% 48.0% 56.1% 28.5% 0.0% 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% 0.0%

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 $33.25
S&P 500 Index 615.93 459.27 466.25 435.71 417.09 330.22 353.40 277.72 247.08 242.17
Polaroid Average P/E (1) 12.1 13.3 15.6 14.2 12.2 15.6 21.8 NMF 14.7 16.6
S&P Industrials Average P/E (1) 15.2 15.5 18.4 19.8 19 14.4 12.6 10.8 15.3 17.5
Polaroid Market/Book Ratio 3.01 1.73 2.04 1.80 1.69 5.63 8.01 1.30 0.70 2.14
Polaroid Beta 1.05 1.05 1.15 1.15 1.20 1.25 1.25 1.25 1.20 1.10
Yield on 30-Year T-Bonds 6.88% 7.37% 6.59% 7.67% 8.14% 8.61% 8.45% 8.96% 8.59% 7.80%
Yield on 90-day T-Bills 5.49% 4.25% 3.00% 3.43% 5.38% 7.50% 8.11% 6.67% 5.78% 5.97%
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% 18.47%

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 $1,019.0 $1,160.3
International 1,217.9 1,152.2
Total Net Sales 2,236.9 2,312.5

Cost of Goods Sold 1,298.6 1,324.2

Marketing, Research, & Admin. 849.1 788.0
Restructuring & Other. 247.0 0.0
Total Costs 2,394.7 2,122.2
Profit/(Loss) from Operations -157.8 200.3

Interest Income 8.7 9.7

Other Income -0.2 -2.7
Interest Expense 52.1 46.6
Earnings/(Loss) Before Taxes -201.4 160.7
Tax Expense -61.2 43.5
Net Earnings/(Loss) -140.2 117.2

Page 3
 Exh. 4

Exhibit 4
Consolidated Balance Sheet
(In $ millions)

1995 1994
Assets
Current Assets
Cash and Cash Equivalents $73.3 $143.3
Short-Term Investments 9.8 85.6
Receivables, less allowances 550.4 541.0
Inventories 615.5 577.4
Prepaid Expenses and Other 208.5 141.4
Total Current Assets 1,457.5 1,488.7
Gross Property Plant and Equipment 2,164.4 2,043.4
Less Accumulated Depreciation 1,473.4 1,296.1
Net Property, Plant and Equipment 691.0 747.3
Prepaid Taxes -- non-current 113.3 80.7
Total Assets $2,261.8 $2,316.7

Liabilities and Stockholders' Equity

Current Liabilities
Short-Term Debt $160.4 $117.1
Current Portion of Long-Term Debt 39.7 35.9
Payables and Acrruals 274.9 275.7
Compensation & Benefits 197.4 121.4
Taxes Payable 46.6 51.8
Total Current Liabilities 719.0 601.9
Long-Term Debt 526.7 566.0
Accrued Postretirement Benefits 257.2 247.2
Accrued Postemployment Benefits 41.2 37.2
Total Liabilities 1,544.1 1,452.3
Preferred Stock 0.0 0.0
Common Stockholders' Equity
Common Stock (1) 75.4 75.4
Additional Paid-In Capital 401.9 387.2
Retained Earnings 1,525.8 1,692.1
Less Treasury Stock, at Cost 1,205.4 1,174.5
Less Deferred Compensation 80.0 115.8
Total Common Stockholders Equity 717.7 864.4
Total Liabilities and Stockholders' Equity $2,261.8 $2,316.7

Page 4
 Exh. 6

Exhibit 6
Financial Forecast, 1996-2000

Actual
1995
Annual Increase in Sales -3.2%
Opng. Profit/Sales 4.0%
Tax Rate
Wkg. Capital/Sales

Income Statement
Net Sales $2,236.9
Operating Profit 89.2
Interest Income 8.5
Interest Expense -52.1
Pre-Tax Income 45.6
Tax Expense -61.2
Net Income -15.6
Dividends 27.3
Retentions to Earnings $ (42.9)

Balance Sheet
Cash $ 83.1
Working Capital (without debt) 855.5
Prepaid Tax 113.3
Net Fixed Assets 691.0
Total Assets 1,742.9

Debt (long and short term) 726.8

Other Long-Term Liabilities 298.4
Stockholders' Equity 717.7
Total Liabilities & Stockholders' Equity $1,742.9

Free Cash Flows

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

Page 5
 Exh. 6

Projected
1996 1997 1998 1999 2000
2.0% 5.0% 6.0% 6.0% 7.0%
8.0% 9.5% 10.0% 10.0% 10.0%
40.0%
37.0%

$2,281.6 $2,395.7 $2,539.5 $2,691.8 $2,880.3

182.5 227.6 253.9 269.2 288.0
5.0 5.0 5.0 5.0 5.0
(52.1) (52.1) (52.1) (52.1) (52.1)
135.4 180.5 206.8 222.1 240.9
(54.2) (72.2) (82.7) (88.8) (96.4)
81.3 108.3 124.1 133.2 144.6
27.3 27.3 27.3 27.3 27.3
$ 53.9 $ 81.0 $ 96.8 $ 105.9 $ 117.2

$ 148.3 $ 187.1 $ 230.7 $ 280.3 $ 327.8

844.2 886.4 939.6 996.0 1,065.7
113.3 113.3 113.3 113.3 113.3
691.0 691.0 691.0 691.0 691.0
1,796.8 1,877.8 1,974.6 2,080.5 2,197.8

726.8 726.8 726.8 726.8 726.8

298.4 298.4 298.4 298.4 298.4
771.6 852.6 949.4 1,055.3 1,172.6
$1,796.8 $1,877.8 $1,974.6 $2,080.5 $2,197.8

$ 182.5 $ 227.6 $ 253.9 $ 269.2 $ 288.0

(73.0) (91.0) (101.6) (107.7) (115.2)
140.0 140.0 140.0 140.0 140.0
(140.0) (140.0) (140.0) (140.0) (140.0)
11.3 (42.2) (53.2) (56.4) (69.7)
$ 120.8 $ 94.3 $ 99.2 $ 105.1 $ 103.1

Page 6
 Exh. 9

Exhibit 9
Key Industrial Financial Ratios
Three-Year Medians (1993-1995)

AAA AA A BBB BB
Pretax interest coverage (x) 13.50 9.67 5.76 3.94 2.14
EBITDA Interest coverage (x) 17.08 12.80 8.18 6.00 3.49
Funds from operations/total debt (%) 98.20% 69.10% 45.50% 33.30% 17.70%
Free operating cash flow/total debt (%) 60.00% 26.80% 20.90% 7.20% 1.40%
Pretax return on permanent capital (%) 29.30% 21.40% 19.10% 13.90% 12.00%
Operating income/sales (%) 22.60% 17.80% 15.70% 13.50% 13.50%
Long-term debt/capital (%) 13.30% 21.10% 31.60% 42.70% 55.60%
Total debt/capitalization incl. short-term debt (%) 25.90% 33.60% 39.70% 47.80% 59.40%

Source: Standard & Poor's CreditWeek October 30, 1996, page 26.

Page 7
 Exh. 9

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

Page 8
 Analysis of Flexibility b

AAA AA A
1 Pre-tax Cost of Debt (Exh. 11) 6.70% 6.90% 7.00%

Required for rating category:

2 Book Value Debt/Capital (Book) (Exh. 9) 25.90% 33.68% 39.70%
3 Market/Book Value of Equity Ratio (Exh. 1) 3.01 3.01 3.01
4 Market Value Debt/Capital 10.42% 14.41% 17.97%

Estimate of Unused Debt Capacity

5 Polaroid Enterprise Value (1) 2883.93 2883.93 2883.93
6 Mkt Value of Polaroid's Existing Debt (1) 726.8 726.8 726.8
7 max Debt implied by rating(2) 300.5055 415.5743 518.2422
8 Unused Debt Capacity at current rating -426.2945 -311.2257 -208.5578
9 Unused Debt Capacity until Investment- -643.6932 -528.6244 -425.9565
Grade Rating is lost (at BB)

Estimate of Interest Coverage

10 Interest Expense (3) 20.13387 28.67463 36.27696
11 Normalized 5-Year EBIT (4) 244.2559 244.2559 244.2559
12 Downside EBIT 150 150 150
13 Coverage Ratio, Normalized EBIT 12.1316 8.518191 6.733088
14 Coverage Ratio, Downside EBIT 7.450133 5.231105 4.134856
Analysis of Flexibility by Rating Category

BBB BB B
6.00% 9.00% 10.60% what is difference in ex 11 ad ex12

47.80% 59.40% 69.50%

3.01 3.01 3.01
0.2335 32.74% 43.09% 10.40407%

160+39.7+526.7+45533*47.38/1000
2883.93 2883.93 2883.93
726.8 726.8 726.8 ex6
673.3977 944.1987 1242.685 944.19=64 643you can borrow before you shift to bb
-53.40235 217.3987 515.8854
-270.801 0 298.4868
673.4
either retire debt or have more equity

40.40386 84.97788 131.7247

244.2559 244.2559 244.2559
150 150 150 given incase
6.045362 2.874347 1.854292 compare ex 9
3.712517 1.765165 1.138739
33*47.38/1000
 Valuation Analysis

Projected
1996 1997 1998
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

stock will come about 30

if stock is overvalued
1999 2000

WACC =
G=
 Capital Costs by Rating Category

AAA AA A
Cost of Debt (pre-tax) 6.70% 6.90% 7.00%
Cost of Equity 10.26% 10.30% 10.40%

Approach Based on Hudson Guaranty Estimates of Equity Costs

Cost of Debt (after 40% tax) 4.02% 4.14% 4.20%
Cost of Equity 10.26% 10.30% 10.40%
Market/Book Ratio (Exh. 1) 3.01 ### 3.01
Debt/Capital (Book) (Exh. 9) 25.90% 33.68% 39.70%
Debt/Capital (Market) 10.42% 14.41% 17.97%
Weight of Debt 0.10 0.14 0.18
Weight of Equity 0.90 0.86 0.82

WACC (using Mkt. Wts.) 9.61% 9.41% 9.29%

WACC (using Book Wts.) 8.6438400% 8.2253120% 7.9386000%
0.00

Alternative Approach Based on CAPM and Levered Beta

AAA AA A
Cost of Debt (pre-tax) 6.70% 6.90% 7.00%
Unlevered Beta 0.87 0.87 0.87
Debt/Equity (Market) 11.63% 16.84% 21.91%
Relevered Beta 0.93 0.96 0.99
Cost of Equity (Rf=.0624, EMRP=.054) 11.29% 11.43% 11.58%

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

Cost of Equity 11.29% 11.43% 11.58%
Market/Book Ratio (Exh. 1) 3.01 ### 3.01
Debt/Capital (Book) (Exh. 9) 25.90% 33.68% 39.70%
Debt/Capital (Market) 10.42% 14.41% 17.97%
Weight of Debt 0.10 0.14 0.18
Weight of Equity 0.90 0.86 0.82

WACC (using Mkt. Wts.) 10.53% 10.38% 10.25%

WACC (using Book Wts.) 9.40% 8.98% 8.65%

Note: Estimation of Polaroid's Unlevered Beta:

Long-term Debt Levered Beta 1.05
Short-term Debt Tax Rate 0.4
Total Debt 726.8 Unlevered Beta 0.87342965
Mkt. Value of Equity 2157
Debt/Capital (market)

Debt/ Equity (market) 0.34

 BBB BB B
7.40% 9.00% 10.60%
10.50% 11.75% 13.00% ex 11

4.44% 5.40% 6.36%

10.50% 11.75% 13.00%
3.01 3.01 3.01
47.80% 59.40% 69.50%
0.2335 32.74% 43.09%
0.23 0.33 0.43
0.77 0.67 0.57 2,883.75

9.08% 9.67% 10.14% bbb

7.6033200% 7.9781000% 8.3852000%

BBB BB B
7.40% 9.00% 10.60%
0.87 0.87 0.87
30.46% 48.68% 75.72%
1.03 1.13 1.27
11.82% 12.33% 13.10%

4.44% 5.40% 6.36%

11.82% 12.33% 13.10%
3.01 3.01 3.01
47.80% 59.40% 69.50%
0.2335 32.74% 43.09%
0.23 0.33 0.43
0.77 0.67 0.57

10.10% 10.06% 10.20% bb

8.29% 8.22% 8.42%