Timeline

1. 1965-70: Industrial growth >> demand => declining prices => declining
net income
2. Three factors that fucked shit up for Du Pont (1970-75)
-> In early 1970's, Major capital spending in response to compet
etion escalated by inflation
-> 1973 Oil price rise
-> depression in 1975
3. Counter measures:
-> 1974, Cut dividends
-> 1975, working capital investments slashed
None of this worked => dependency on debt. as a result debt rati
o went from 7 -> 27
Interest coverage = 4.6
4. 1976-79: capital expenditures declined (spending program neared compl
etion), tripling of income (moderate increase in energy prices),
interest coverage = 11.5
5. 1979: Debt ratio 20% and company doesn't want to return to 0 debt rat
io policy
6. 1981: Bought Conoco at ~8 billion (3.9 billion through common stock,
3.85 billion thorugh floating rate debt)
-> Increased orientation towards undifferentiate
d commodity products
-> Assumed 1.9 billion Conoco's debt
-> Debt ratio rose to 40%
-> Earnings per share fell by 40%
-> Bond rating: AAA -> AA
7. 1982: Counter measures to fix financial state after conoco:
-> Sale of coal and oil assets from conoco to re
duce debt ratio. debt ratio reduced to 36%(depression hampered the sales).
-> refund of floating rate debt with long term f
ixed rate debt
Still, Interest coverage ratio 4.8
Future Capital Structure Policy
-> Company need to maintain large capital spending to reduce firms cost
position for existing products and rolling out new products quickly and efficien
tly
Increased risk to business => Need to have capital felxibility => lower
debt ratio requirement
Du Pont's operations had high risks because:
-> Undifferentiated products
-> Intense Competition
-> Excess Capacity and High Fixed Cost => competitve prices and
lower profit margins
Aggressive debt ratio policy:
-> largest chem manufacturers
-> Technical leader
-> plans to diversify products
-> capital spending programs to reduce cost in business segments
-> promise of a more benign regulatory environment in future
Pros of high debt ratio policy:
-> higher projected earnings per share
-> better dividends per share
-> higher return on equity
-> zero issuing of equity
Cons of high debt ratio policy:

-> During recession, earnings per share and devidends will be severely a
ffected
-> Questionable fund availability for all economic condition
Con lower debt ratio policy:
lower earnings, equity infusions