Du Pont Havard Business Case Study

CASE SUMMARY

NAME: Jenna Plotzyk

DATE: 4/27/2016

CASE TITLE: E.I Du Pont de Nemours and Company – 1983

(1) BACKGROUND:

Du Pont (DP) is an American chemical company founded in 1802. By 1900, DP expanded through research and acquisition and grew to be the largest U.S. chemical manufacturer. In 1981, DP merged with a major oil company, Conoco, Inc. In order to finance the purchase of Conoco, DP issued $3.9 billion in common stock and $3.85 billion in floating rate debt. The acquisition caused DP’s debt ratio to soar from less than 20% to 46% in 1981. Their bond rating was downgraded from a AAA to a AA. The merger of Conoco and increase in the debt ratio marked the second time in 10 years that DP departed from its traditional capital structure policy.

(2) MAJOR PROBLEM(S):

DP must decide which capital structure policy to apply to cover all capital spending in the years ahead.

(3) ALTERNATIVE COURSES OF ACTION:

DP could implement a debt ratio of 25% or 40%.

(4) BRIEF ANALYSIS OF ALTERNATIVES:

Imposing a debt ratio of 25% would insure a high degree of financial flexibility and insulate DP’s competitive strategy from capital market conditions. This ratio would restore their historical financial strength and help them return to a AAA bond rating. However, reducing the debt ratio this much would not be easy – it would require large issues of equity each year. Since DP’s stock price has yet to recover from the Conoco merger at this time, this raised concerns about the availability of substantial new equity financing required. On the other hand, if DP were to implement a 40% debt ratio and abandon their conservatism, it would be easy to recover from the merger and generate higher EPS. In addition, no equity issues would be required through 1985. However, high financial leverage leads way to more risk. The availability of funds in the poor economic conditions may place constraints on DP’s operations.