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    DuPont Case Study

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    jlee174
    DuPont underwent significant changes to its capital structure in the 1970s, increasing its debt ratio to over 40% from less than 10% due to acquisitions, inflation, and recession. This led to a downgrade of its credit rating. We recommend DuPont target a 40% debt ratio going forward to take advantage of tax benefits of debt financing and send positive signals to the market, despite its past financial issues. Maintaining a lower debt ratio would require costly equity issuances and signal the board believes the share price is accurate when it is actually undervalued.

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    DuPont Case Study

    Uploaded by

    jlee174
    994 views1 page
    DuPont underwent significant changes to its capital structure in the 1970s, increasing its debt ratio to over 40% from less than 10% due to acquisitions, inflation, and recession. This led to a downgrade of its credit rating. We recommend DuPont target a 40% debt ratio going forward to take advantage of tax benefits of debt financing and send positive signals to the market, despite its past financial issues. Maintaining a lower debt ratio would require costly equity issuances and signal the board believes the share price is accurate when it is actually undervalued.

    Original Description:

    This is a case study that highlights DuPont Chemicals Company and their financial decisions.

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    DuPont underwent significant changes to its capital structure in the 1970s, increasing its debt ratio to over 40% from less than 10% due to acquisitions, inflation, and recession. This led to a downgrade of its credit rating. We recommend DuPont target a 40% debt ratio going forward to take advantage of tax benefits of debt financing and send positive signals to the market, despite its past financial issues. Maintaining a lower debt ratio would require costly equity issuances and signal the board believes the share price is accurate when it is actually undervalued.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    994 views1 page

    DuPont Case Study

    Uploaded by

    jlee174
    DuPont underwent significant changes to its capital structure in the 1970s, increasing its debt ratio to over 40% from less than 10% due to acquisitions, inflation, and recession. This led to a downgrade of its credit rating. We recommend DuPont target a 40% debt ratio going forward to take advantage of tax benefits of debt financing and send positive signals to the market, despite its past financial issues. Maintaining a lower debt ratio would require costly equity issuances and signal the board believes the share price is accurate when it is actually undervalued.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 1

    Subject: DuPont Case Study

    Summary & Recommendations:


    Given Du Ponts financial history and current position, we recommend that they forego a low
    debt capital structure for a 4! target debt ratio and attempt to cut their dividend" #n the period
    of $%&'($%)$, Du Pont had undergone drastic change in their capital structure policy" #ncreases
    in industry capacity surpassed demand growth, driving prices down" *long with inflations
    effect on re+uired capital spending, the oil shoc, driving up costs, a recessionary environment
    for the industry, and the vertical ac+uisition of Conoco, Du Ponts capital structure was near
    unrecogni-able by the end of the transitionary period" Du Ponts debt ratio stood at 4.!, up from
    less than .! and eventually led to a downgrading of the firms credit rating to **" Due to
    Conocos performance after the ac+uisition, the firm was in a troubled situation" Du Pont sold a
    part of Conocos assets dropping its debt ratio to /&!0 Despite +uestionable financial ratios and
    poor earnings in )., Du Pont maintained its ** rating"
    Key Issues
    1he pec,ing order theory postulates that maintaining a 4! debt level would be ideal
    over the target .'! debt scenario" 2educing the debt ratio would re+uire large issuing of
    e+uity, a source of capital that is more e3pensive than debt" *dditionally, Du Ponts
    diversified business units provide e3tra protection from the added(on ris, of debt
    Du Ponts shares are undervalued due to investor conceptions from previous financial
    performance" 1he Conoco ac+uisition, although costly and unluc,y, reduces costs for Du
    Pont as its vertical integration potential is still largely untapped" #ssuing e+uity would
    only signal the boards belief that the share price is accurate4over(valued, driving the
    price down even further" 5ther industry competitors are at a 4! debt level
    *ccording to the 676 theorem, Du Ponts value as a firm is correlated to its debt level"
    1he 4! debt scenario will yield higher dividends per share, earnings per share, and
    258"
    #ncreasing target debt levels would send positive signals to the mar,et by demonstrating
    the ability to increase debt levels while staying financially stable" 1his should lead
    investors to focus on anticipated future growth"

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