Du Pont De Nemours and Company: Titanium Dioxide

FIN 502  -  Managerial Finance  -  October 2018

Case 1

E.I. du Pont de Nemours and Company: Titanium Dioxide

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In this case you are asked to analyze two different investment strategies the “maintain” and the “growth”.  You will need to use an incremental approach in comparing each strategy to the         no-growth strategy which is Du Pont’s current strategy.  Use the information provided within the case and in addition make these assumptions.  There will be no additional foreign competition, that Du Pont will make available to its competitors at no cost all the necessary information so that the competition can develop the chloride process to use in producing titanium dioxide, and that Du Pont will no longer restrict the licensing of the ilmenite chloride process. Assume that these will eliminate any threat of anti-trust problems.  

The strategy that Du Pont actually selected may or may not have been the correct one.  What is important is how you analyze the problems in the case.  Explaining your logic and reasoning when answering a questions can definitely help your grade.  

The 1972 rates were as follows:

90-day commercial paper = 4.6%

Long-term treasuries = 6.2%

AAA corporate bonds = 7.2%

Baa corporate bonds = 7.8%

Inflation rate (CPI) = 3.2%

Case Format

Put your group’s number and the names of all participating group members on the cover page.  The answers to each question should not exceed 1/2 page not counting any supporting spreadsheets.  One set of questions with answers and a growth spreadsheet is due from each group and should be the work of only your group.  Be sure to put the number of the question you are answering next to the answer.  If you provide information in an exhibit, you must put only that exhibit next to the question you are answering.  Remember I must be able to see all the numbers on your growth spreadsheet on one page!!

Case #1

Questions for the Du Pont Case

1. Du Pont says that the objective of the growth strategy is to boost Du Pont’s share of the titanium dioxide market to almost 65%.  What will be the consequences if most of Du Pont’s competitors decide to switch to the chloride process? (2 points)

1. Explain what steps that Du Pont must take to keep its competitors from switching to the chloride process? (3 points)

1. Describe only the disadvantages that Du Pont will face if it implements the ‘maintain’ strategy. (3 points)

1. Attach your ‘growth’ spreadsheet to show the incremental cash flows that you expect from the ‘growth’ strategy.  Use only the spreadsheet that is provided and make no adjustment to it!  Make sure that the spreadsheet fits on one page when downloaded!!  (2 points)

1. Du Pont plans to continue indefinitely in the titanium dioxide business.  To avoid an infinite number of calculations needed to determine the value of each strategy, you need to determine the terminal value for the growth and for the maintain strategy for 1985.  Write out the formula you used to determine the terminal value and then show and explain the numbers you used when determining the terminal values.  Do not use the value of Du Pont’s investments in working capital and/or the book value of the assets in determining the terminal values. (2 points)        

6.        Given the increment cash flows you are forecasting from each strategy, what rate of return do you expect to be able to generate from each strategy?  Clearly show and explain the numbers that you used in making each of these calculations. (2 points)

7.        Is the ‘maintain’ strategy or the ‘growth’ strategy, the most risky for Du Pont to undertake?  Explain why one strategy is more risky than the other.  Hint, you don’t need to use any numeric calculation to determine the risk, the logic of your answer should be based on what you have learned from the case and this should weigh heavily on your answer.  (3 points)