Dupont Case Study

Discussion Questions for “DuPont de Nemours & Company” Case

1. Why did DuPont abandon its AAA debt-rating policy?

-financing of Conoco acquisition caused them to issue $3.9 billion in common stock and $3.85 billion in floating rate debt, while also assuming $1.9 billion in outstanding Conoco debt

-the acquisition doubled DuPont’s size and significantly increased its orientation toward undifferentiated commodity products

What were the consequences?

-acquisition increased debt ratio to 42% when it was less than 20% before acquisition

-refund most of floating rate debt to fixed rate long term debt

-DuPont wanted to reduce their debt with the sale of Conoco oil and coal but a depression in energy prices forced a change in plans

-had the ability to pursue an aggressive debt policy because they were widely diversified (p 298, 2nd paragraph)

-high capital spending, so a need for external financing to pay for it

What is the role of bond ratings?

-whether the company can repay the loan and interest payments on time

-AAA means that the company is expected to be able to handle repayment easily due to certain factors such as debt ratios

2. Compare and contrast the two debt policy alternatives outlined in case Exhibit 8 for 1987. What bond rating would DuPont receive under each alternative?

Alternative 1: higher debt/total cap per year, lower interest rates, higher EPS, higher Div PS, higher return on equity, much less new equity issued and number of shares sold

Alternative 2: higher new equity issues and number of shares sold

How would its financial performance, financing needs, access to capital, and financial risk differ under the two alternative debt policies?

-return on total capital is the same for both

-return on equity is much higher under the 40% debt

-the interest coverage in the 25% debt situation is better because it has more coverage and the debt decreases over the time period in question

- I would say the financial risk...