Statement of the Problem
Determine a capital structure policy suitable for Du Pont in the 1980s and beyond. This paper will consider the history of the company and the turbulent times of the 1960s and 1970s, weigh the advantages and disadvantages associated with higher and lower levels of debt, and develop a strategy for the future after the merger with Conoco Inc. in 1983.
Du Pont has been historically known for its financial stability and low debt to equity ratio which maximized funding flexibility and protected the business from many financial constraints. Competition increased in the 1970s and caused the firm to deviate from its low debt levels and its use of internally generated monies to fund projects. They cut their dividend and began using debt as a source of financing. They recognized the problems associated with this and were able to reduce their debt levels and maintain a triple A bond ratio. Instead of continuing to reduce their debt to their previous levels, they decided to go in the other direction and used more debt to acquire Conoco Inc., a major oil company, for a very high price. This worried investors and the increase in debt downgraded their bond rating to AA for the first time in the company's two hundred years. Adopting a conservative capital structure for the future would restore confidence and give the firm greater financial freedom to fund research and development and pursue new projects. Given the current of the state of the company, going back to their conservative strategy would be very difficult to attain and require large new equity and stock issues. If the company chooses to move to higher leveraged position with more debt they can take advantage of the tax shield created and wouldn't have to issue that much more debt to continue to finance future projects. This increased leveraged position brings greater financial risk and less...