Dupont Case Study

Subject: DuPont Case Study

Summary & Recommendations:

Given Du Pont’s financial history and current position, we recommend that they forego a low

debt capital structure for a 40% target debt ratio and attempt to cut their dividend. In the period

of 1965-1981, Du Pont had undergone drastic change in their capital structure policy. Increases

in industry capacity surpassed demand growth, driving prices down. Along with inflation’s

effect on required capital spending, the oil shock driving up costs, a recessionary environment

for the industry, and the vertical acquisition of Conoco, Du Pont’s capital structure was near

unrecognizable by the end of the transitionary period. Du Pont’s debt ratio stood at 42%, up from

less than 20% and eventually led to a downgrading of the firm’s credit rating to AA. Due to

Conoco’s performance after the acquisition, the firm was in a troubled situation. Du Pont sold a

part of Conoco’s assets dropping its debt ratio to 36%; Despite questionable financial ratios and

poor earnings in ’82, Du Pont maintained its AA rating.

Key Issues

• The pecking order theory postulates that maintaining a 40% debt level would be ideal

over the target 25% debt scenario. Reducing the debt ratio would require large issuing of

equity, a source of capital that is more expensive than debt. Additionally, Du Pont’s

diversified