Du Pont Paper Capital Structure Case

2836 Words Mar 2nd, 2009 12 Pages
B.A. 142 CASE 2

EXECUTIVE SUMMARY

E. I. du Pont de Nemours is an American chemical company that has recently acquired the major oil company of Conoco Inc. and is becoming one of the largest chemical manufacturers in the United States. Its financial conservatism has pushed Du Pont to the forefront of the industry as its profitability soared, providing it with the liquidity to readily finance its cash needs. But several competitive conditions posed a challenge to its risk averse financial policy as the 1970's was characteristic of a declining level of industry demand and price, along with rising fuel prices and an economic recession. These pressures now force Du Pont to source its financing through debt, foregoing its risk averse
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During the 1980s, Du Pont entered and won a bidding contest for Conoco, doubling its size and significantly increasing its orientation toward undifferentiated commodity products, but this move, however, was responded with negativity by the industry analysts. The purchase of Conoco was financed through issuance of common stock and a floating-rated debt, propelling Du Pont's debt ratio from 20% to 40%, downgrading its bond rating to AA, the first time in the company's history. With declining oil prices hampering the the company's performance, and an economic recession plaguing the chemical industry, its return on capital and earnings per share fell dramatically.

Du Pont's financial policy had always been based on maximization of financial flexibility. Taking to consideration the riskiness of Du Pont's businesses, its competitive position and profitability had declined in the last 20 years. Moreover, the firm is still forced to seek external financing each year for the next five years (1983-1987) due to the continued high level of capital expenditures which are considered non-deferrable to redress the causes of poor performance. In view of the importance and magnitude of the projected financing needs, the firm is concerned about how the cost and availability of debt
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