E.I. Du Pont de Nemours & Co. (1983) Case Study

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PROBLEM: Du Pont has to decide the capital structure that it should adopt, commit and communicate to investors given its current business model and future prospects. ANALYSIS: It is said that the appropriate capital structure a company must adopt is that which all available and relevant factors have been taken into account, analyzed and balanced. The capital structure should balance both the interest of the shareholders and the financial requirements of the company. The ideal capital structure would also lead to maximizing the long-term market price per share of the company. Du Pont has been known to be ultra-conservative in its capital structure but it has deviated from this policy twice over the last 10 years. The case mentioned that due to Du Pont’s substantial projected capital spending requirements it would be impossible for the company to return to zero debt policy - its current policy. The case then provided two (2) alternatives Du Pont can choose with regards to the debt policy it may adhere and convey to its investors: (i) 25% debt-equity ratio or conservative debt policy; or (ii) 40% debt-equity ratio or aggressive debt policy. In analyzing the options available to Du Pont, the group listed down the factors which either support (PRO) or oppose (CON) such alternative. These factors were either lifted from case facts or considered to be the advantages and disadvantages of either a conservative or aggressive debt policy. The group shall then state its recommendation for Du Pont - highlighting the factors of an ideal capital structure that relate to these facts. ALTERNATIVE 1: 25% debt-equity ratio PROS: • Conservative debt policy complements Du Pont’s current heightened business risk exposure. Du Pont’s basic businesses have increased their volatility; characterized by undifferentiated commodities and intense competition. Hence,

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