E. I.

DU PONT DE NEMOURS AND COMPANY (1983r

CASE 2

Inearly 19S3 the management of E. I. du Pant de Nernours and Company (Du

Pant) looked bad, on two decades of turbulence in the firm's operations. Difficulties in
the 1970s and the megu-merger with Conoco had led the company to abandon its long-
held policy of an all-equity capital structure. Following the Conoco acquisition in 19S1 ,
Du Pant's ratio of debt to total capital had peaked at 42% - the highest in the firm's --
history. The rapid escalation in financial leverage had cost Du Pant its cherished AAA
bond rating. Du Pant he j not regained the top rating despite a reduction in debt to 36%
of capital by the end of 19S2.

The operations of Du Pant had changed dramatically in the past 20 years. With
the task of digesting Conoco underway, management faced an important financial policy
decision - determining a capita! structure policy appropriate for Du Pant in the 19S0s.
This decision would have implications for Du Pant's financial performance and possibly
for its competitive position as well.

E. I. du Pant de Nemours and Cumpany was founded in 1802 to manufacture

gunpowder. By 1900, Du Pant had bequn to expand rapidly throuqh research and
acquisitions. A technological leader in chemicals and. .fibers, the firm grew to be the
largest U.S. chemical manufacturer. At the end of 19RO the firm ranked fifteenth on the
Fortune 500 list of U.S. industrials. The 19S1 merger with Conoco, lnc., ::I major oil
company, elevated Du Pant to seventh place on the list of U.S. industrials.

Capital Structure Policy, 1965-1982

Historically Du Font had been well known for its policy of extreme finar.cial
conservatism. The company's low debt ratio was feasible in part because of its success
in its product markets. Du Pant's high level of profitability allowed it to finance its needs
through internally generated funds (see Exhibits 1 and 2 for selected financial data). In
fact, financial leverage was actually neqative between 1965 and 1970, since Du Pant's
cash balance exceeded its total debt. Du Pant's conservative use of debt combined with
its profitability and technological leadership in the chemical industry had made the
company one of the few AAA-rated manufacturers. Du Pant's low debt policy maximized
It§ rin~nclal flexlbllity and insulated its operations from financing constraints.

In the late 1960s competitive conditions in Du Pant's fibers and plastics

businesses began to exert pressure on the firm's financial policy. Between 19E5 and

. Copyright ©1984 by the President and Fellows of Harvard College.

Harvard Business School case 284·062 I
1970 increases in industry capacity outstripped demand growth, resulting in substantial
price declines. As a result, Du Pant experienced decreases in gross margins and return
on capital. Despite continued sales growth, net income fell by 19% between 1965 and
1970.

Three factors combined to intensify the pressure on Du Pant's financinq policy in

the mid-1970s. In response to competitive pressures Du Pant in the early 1970s
embarked on a major capital spending program designed to restore its cost position.
The escalation of inflation ballooned the cost of the program to more than 50% over
budget by 1974. Since capita: spending was critical to maintaining and improving its
competitive position, Du Pant was reluctant to reduce or postpone these expenditures .. _
Second, the rapid increase in oil prices in 1973 pushed up Du Pant's feedstock costs
and increased required ·inventory investment, while oil shortages disrupted production.
Du Pant experienced the full impact of the oil shock in 1974; its revenues rose by 16%
and costs jumped by 30%, causing net income to fall by 31 %. Finally, the recession in
1975 had a dramatic impact on Du Pant's fiber business. Between the second quarter of
1974 and the second quarter of 1975, Du Pont's fiber shipments dropped by 50% on a
volume basis. Net income fell by 33% in 1976. Over the period 1973-1975 Du Poot's net
income, return on total capital, and earnings per share ,~IIfell by more than 50%.

Severe financing· pressures resulted from the combination of inflation's impact on

needed capital expenditures, cost increases driven by the escalation in oil prices, and
recessionary conditions in the fiber business. The reauired investment in working capital
and capital expenditures increased dr amatically at a time when internally generated
funds were shrinking. .Du Pont responded to the financing shortfall by cutting its
dividend in 1974 and 1975 and slashing work!ng capital investment.

Since these measures were insufficient to meet the entire financing requirement,
Du Pant turned to debt financing. With no short-term debt outstanding in 1972., the tirm's
short-term debt rose to $540 million by the end of 1975. In addition, in 1974, Du Pant
floated a $350 million 30-year bond issue and a $150 million issue of 7-year notes. The
former was Du Pant's first public long-term debt issue in the U.S. since the 1920s. As a
result, Du Pant's debt ratio rose from 7% in1972 to 27% in 1975, while interest coveraqe
collapsed from 38.4 to 4.6 over the same period. Despite concern that the rapid
increase in the company's debt ratio might result in a downgrading, Du Ponrretained its
AAA bond rating during this period. Had Du Pont abandoned its policy of financial
conservatism, or was this a temporary departure from that policy forced by extraordinary
financing pressures? In December 1974, Du Pant CE=O Irving Shapiro stated, "We
expect to use prudent debt financing over the long term,"

Nonetheless, DU' Pont moved quickly to reduce its debt ratio. Between 1976 and
1979 flnancinq pressures eased. Capital expenditures deciined from their 1975 peak 3S
the spending program initiated in the early 1970s neared completion. Net income more
than tripled during the period 1975-1979, helped by relatively moderate energy price
increases and the economywide recovery from the 1974-1975 recession. Du Pant
reduced the dollar value of its total debt in 1977, 1978, and 1979: By the end of 1979,
 Du Pont's debt had been pared to about 20% of total capital and interest cove~ had
rebounded to 11.5 from 4.6 in 1975. Once again the firm was well within the AM-rated
range. However, it was not apparent that the firm would return to the zero debt JIlIicy of
the past. In 1978, Richard Heckert, a Du Pont senior vice president, noted, "'\,We we
presently anticipate some further reduction in borrowings, we have considerable
borrowing capacity and hence considerable flexibility."

An abrupt departure from maximum financial flexibility occurred in the ~er of

1981. In July, Du Pont entered a bidding contest for Conoco, Inc., a major oil company
and the fourteenth larqest U.S. industrial. After a brief but frenetic battle, l)J Pont
succeeded in buying Conoco in August 1981. The price of almost $8 billion naie the._
merger the largest in U.S. history and represented a premium of 77% above Conoco's
preacquisition market value. With the acquisition, Du Pont virtually doubled its size and
significantly increased its orientation toward undifferentiated commodity produds. Both
Du Pont's stock price and industry analysts responded negatively to the aC(JJisition.
Major concerns included the high price Du Pont had- paid and the question of how
Conoco would contribute to Du Pont's strategic objectives.

To finance the pi.rchase of Conoco, Du Pant issued $3.9 billion in comrmn stock
and $3.85 billion in floating rate debt. In addition, Du Pont assumed $1.9 ~ion of
outstanding Conoco debt. The acquisition propelled Du Pant's debt ratio toneaty 40%
from slightly over 20% at the end of 1980. Du Pont's bond rating was downgraded to
.A.A, marking the first time in its history that the firm had fallen below the top rating.

The first year after the merger was a difficult une for Du Pont. Conoco's
. performance was hampered by declining oil prices in 1982, while' an economic
recession plagued the chemical industry. Although Du Pant's 1982 revenues were 2 %
times 1979 sales, net income in 1982 fell below 1979 results; return on total capital was
cut in half during this period and earnings per share fell by 40%.

As Du Pant's rnanaqernent worked to frame and implement a coherent strategy

for the merged company, they also got to work to repair the firm's extended financial
condition. To reduce interest rate exposure, Du Pont refunded most of the firm's
floating-rate debt with f.xed-rate long-term debt issues. Plans tu reduce debt with the
proceeds from the sale of $2 billion in Conoco coal and oil assets were frustrated by
depressed energy prices. One analyst complained,' "Du Pant managed to acquire
Conoco at the peak of the oil cycle, and now they are looking at a tremendous glut of
coal assets for sale tt at is going to make it very difficult to sell coal properties."
Nevertheless, by the end of 1982, Du Pont had pared its debt ratio to 36% from the
postmerger peak of 42%. Poor earnings in 1982 held interest coverage down to a near
record low of 4.8. The firm retained its AA bond rating.

The increase in debt ratio accompanying the Conoco merger marked the second
time in 10 years that Du Pont departed from its traditional capital structure policy. This,
plus the fundamental changes in Du Pont's businesses, mandated the determination of
a capital structure policy that would be feasible and appropriate for the years ahead.
Future Capital Structure Policy

Du Pont's financing policy had always been predicated on the notion of

maximizing financial flexibility. This ensured that financing constraints did not interfere
with the firm's competitive strategy. However, competitors differed widely from Du Pant
and each other in their use of financial leverage (see Exhibit 3). Why should not Du
Pant, like Dow Chemical and Celanese, reap the benefits of aggressive debt financing
even if this resulted in a further reduction in its bond rating? (See Exhibit 4 for bond
rating data.) Of course, electric utilities and telephone companies maintained high bond
ratings despite aqqress.ve use of debt (see Exhibit 4). While Du Pont's performance
was more volatile than a company like AT&T, it was less volatile than many competitors
and other industrial firms (see Exhibit 5).

In framing a dr.bt policy, a key concern W;3.S how risky were Du Pant's
\

businesses. The degree of business risk would help determine how much debt Du Pant
could safely employ in its capital structure without unduly constraining its competitive
strategy. The last 20 years had documented the increased volatility of Du Pent's basic
businesses. Du Pont's competitive position and profitability had declined in many
product lines. In many businesses, products were close to being undifferentiated
commodities, and intense competition was common. Excess capacity and the
economics of high-fixed-cost businesses pressured prices and profits. Moreover,
Conocc competed in a volatile commodity business, a .business in which Du Pant's
management had little experience. The increased risk of Du Pent's operations arqued
for a relatively conservative capital structure.

Nonetheless, several factors suggested that the firm could pursue an aggressive
debt policy. Du Pont was still the nation's largest chemical manufacturer, and large-
scale economies were <1 common characteristic of chemical production processes. The
firm remained the tech.ioloqical leader in the industry, and its success at R&D was
second to none. Du Pont was pursuing capital spending programs designed to reduce
costs in all business segments. The firm was widely diversified in terms of products and
markets. In the past, Du Pont's economic muscle had often been constrained by
aggressive antitrust po'icy, but the near-term future, held some promise <of a more
benign regulatory environment. As for the impact of Conoco 0:1 Du Pont's business risk,
some analysts thought the major diversification move would dampen the volatility of the
firm's earnings. Edward Jefferson, who succeeded Irving Shapiro as Du Pont's chief
executive officer, agreed, reasoning that the merger would "reduce the exposure of the
combined companies to fluctuations in the price of energy."

Even with a recovery in gro::;s margins, strong sales growth, and successful sales
of COIlOCO assets, Du Pont would be forced to seek external financing each year trom
1983 to 1987 (see Exhibit 6 for projections). The major reason was the need for a
continued high level of capital expenditures. Capital spending was viewed as critical to
Du Pant's future success because it was the key to minimizing the firm's cost position in
existing products and launching new products swiftly and efficiently. In view of its
importance, capital spending was essentially nondeferrable and often had to be
increased rather than cut in bad times in order to redress the causes of poor
performance.

Because of its large, nondeferrable financing needs, Du Pant was concerned

about the cost and availability of financing (see Exhibit 7 for data on financing costs and
volumes). Companies with high debt ratios and low bond ratings appeared to have
some difficulty in obtaining debt financing in some years. However, firms rated A and
above appeared to have little difficulty in raising funds. But compared with MA-rated
firms, the cost of debt financing was higher for A-rated firms, and the spread between A
and AAA rates widened in high-interest-rate environments. In view of the importance--
and magnitude of Du Pant's projected financing needs, the firm was concerned about
how the cost and availability of debt might affect its ability to pursue capital spending
programs critical to its competitive position.

Capital Structure Policy Alternatives

One alternative for Du Pant was to restore its historicai financial strength and
AAA rating. Given Du Pont's substantial projected capital spending requirements, a
return to zero debt was infeasible. A target ratio of debt to capital of 25% should be
sufficient to ensure a high degree of financial flexibility and insulate Du Pant's
competitive strategy from capital market conditions. However, achieving this debt ratio
would not be easy (see Exhibit 3 for data on poiicy alternatives). Reducing the debt ratio
from 36% in ~982 to 25% by the end of 1986 would require large equity issues in each
year. Maintaining the tc.~-getof 25% debt in "1987 would require additional large equity
infusions. As of thp. end of 1982, Du Pant's stock price had yet to recover from the
market's negative reaction to the Conoco rnerqer reinforced by the continuing recession.
This raised questions concerning the terms and availability of the substantial new equity
financing required to achieve a 25% debt ratio (see Exhibit 7 for equity issue data) .
.;

Although a conservative capital structure policy had the force of tradition, it was
not clear that conservatism was appropriate for Du Pant in the 1980s. The cost of
conservatism was clear (see Exhibit 8). Were Du Pont to abandon forever its historical
conservatism and maintain a 40% target debt ratio, many measures of financial
performance would benefit. For the recovery scenario projected in Exhibits 6 and 8, a
high-debt policy generated higher projected earnings per share, dividends per share,
and return on equity. No equity issues would be required through '1985. Equity issues in
1986 and 1987 would be much smaller than projected for the low-debt policy and thus
might be more easily timed to take advantage of favorable market conditions. However,
with higher financial leverage comes higher risk. In a pessimistic scenario (e.q., a
recession), earnings per share and return on equity would suffer more severe declines
with the high-debt policy. Other' concerns were the availability of funds in all economic
conditions with the high-debt alternative and the constraints limited availability might
place on Du Pant's operations.
The Decision

The two decades drawing to a close in 1982 brought fundamental changes in Du

Pont's businesses, culminating in the historic acquisition of Conoco. This acquisition
also forced a dramatic departure from Du Pont's Ibhg-held capital structure policy.
These changes both mandated and provided the opportunity for a fundamental
reassessment of Du Pont's financing policy. In view of the escalation in Du Pont's debt
ratio, the downgrading of its bond rating, and the negative stock market response to the
Conoco merger, there was a considerable degree of uncertainty concerning Du Pont's
financial policy. This underscored the importance of determining, committing to, and>
communicating a capital structure policy in the near future.
 EXHIBIT 1
Selected Financial Data, 1965 - 1982 (millions of dollars except per share data)

,
1965 1966 1967 1968 1968 1970 1971 1972 1973

1. Sales s 2,999 $3,159 $ 3,079 $3,455 $ 3,632 $3,618 $3,848 $4,366 $ 5,964
2. EBIT 767 727 574 764 709 590 644 768 1,100
3. Interest 2 4 7 7 10 11 15 20 34
4. Profit after taxes 407 389 314 372 356 329 356 414 586
Profit after taxes/Sales 13.6% 12':'3% 10.2% 10.8% 9.8% .. 9.1% c...g.3% 9.5% 9.8%
5.
6. After-tax return on
Total capita' a 18.5% 16.6% ~3.0% 14.2% 12.8°/1 11.1% 10.9% 12.1% 15.1%
7. Return on equity 18.6% 16.8"10 130% 14.6% 13.3("/0 11.8% 11.5% 12.7% 16.3%
8. Earnings per share $ 2.93 $ 2.83 $2.7.4 $ 2.66 $2.54 $2.29 $ 2.44 $ 2.83 $4.01
9. Dividends per share 2.00 1.92 1.67 1.83 1.75 1.68 1.67 1.82 1.92
10. Average stock price 81.04 80.88 54.42 54.25 44.46 38.29 47.92 54.77 58.13
11. Average stock price/
Earnings per share 27.4 28.6 24.3 20.4 17.5 16.7 19.6 19.4 14.5
12. Market value/
Book value 5.40 5.28 3.26 , 3.07 2.3t3 1.98 2.40 2.61 2.49
13. S&P 400 PIE 16.8 15.2 17.0 . 17.3 17.5 16.5 18.0 18.0 13.4
14. S&P 400 market value/
Book value 2 13 1.96 2.00 2.12 2.07 1.69 1.95 2.10 1.89

(continued)

Sources: Du Pant annual reports; Standard and Poor's Corporation.

aAfter-tax return on total capital=(EBIT) (1 - Tax rate)/(AII debt + Equity). Average stock price is average of year's high and low values. Per share
data restated to be comparable with number of shares outstanding at December 31, 1982.
EXHIBIT 1(concluded)

1974 1975 1976 1977 1978 1979 1980 1981 1982 I

1. Sales $6,910 $7,2n $8,261 $9,435 $10,584 $12,572 $13,652 $22,810 $33,331
2. EBIT 733 574 961 1,141 1,470 1,646 1,209 2,631 3,545
3. Interest 62 126 145 169 139 143 111 476 739
4. Profit after taxes 404 271 459 545 797 965 744 1,081 894
5. Profit after taxes/Sales 5.8% 3.8% :5.5% 5.8% 7.5% 7.7% 5.4% 4.7% 2.7%
6. Arter-tax retun, on
Total capital a 9.0% 6.6% 9.7% 11.1% 13.7% 15.1% 10.9% 7.5% 6.6%
7. Return on equity 10.7% 7.1% 11.4% 12.6% 19.7% 18.2% 13.1% 10.3% 8.2%
8. Earnings per share $ 2.73 $ 1.81 $ 3.30 $ 3.69 $ 5.18 $ 6.23 $ 4.73 $ 5.81 $ 3.75
9. Dividends per share 1.83 1.42 1.75 1.92 2.42 2.75 2.75 2.75 2.40
10. Average stock price 43.92 35.96 46.42 40.04 39.34 42.63 40.32 45.88 37.19
11. Average stock price/
Earnings per share 16.1 19.0 15.0 10.9 7.3 6.6 8.4 10.0 9.8
12. Market value!
Book value 1.81 1.46 1.76 1.41 1.26 1.22 1.09 1.04 0.83
13. S&P 400 PIE 9.4 10.8 10.4 9.6 8.2 7.1 8.4 8.5 10.4
14. S&P 400 market value/
Book value 1.34 1.31 1.43 1.33 1.20 1.17 1.26 1.2~ 1.16

Sources: Du Pant annual reports; Standard and Poor's Corporatior; ..

a =
After-tax return on total capital (EBIT) (1 - Tax rate)/(AII debt + Equity). Average stock price is average of year's high and low values. Per share
data restated to be comparable with number of shares outstanding at December 31, 1982.
 EXHIBIT 2
Selected Data Related to Funds Needs and Financial Strength, 1965 -1982 (millions of dollars)

1965 1966 1967 1968 1969 1970 1971 1972 1973

Capital expenditures $ 327 $ 531 $451\- $332 $391 $471 $454 $522 $727
Change in working
Capital a (163) 121 102 154 135 (39) 63 278

Capital structure
Short-term debt $0 $0 $ 31 $ 57 $ 45 $ 56 $0 $0 $169
OC/o 0% 1.2% 2.:% 1.6% 1.9% 0% 0% 4.2%
Long-term debt $ 34 $ 58 $ 95 $ 150 $ 141 $ 160 $ 236 $ 240 $ 250
15% 2.4% 3.7% 5.5% 4.9% 5.3% 7.1% 6.8% 6.2%
Equity $2,190 $2,317 $2,409 $2,540 $2,685 $2,790 $3,095 $3,267 $3,593
98.5% 97.6% 95.1% 92.4% 93.5% 92.8% 92.9% 93.2% 89.6%
Total capital $ 2,224 $2,375 $2,535 s 2,747 $2,871 $3,006 $3,331 $3,507 $4,012
100.0% 100.0% 1GO.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Interest coverage 383.5 181.8 82 109.1 70.9 53.6 42.9 38.4 32.4
Bond rating
(senior debt) AAA AAA AAA AAA AAA AAA AAA AAA AAA

(continued)

Source: Du Pant annual reports.

a Working capital investment is defined here as net working capital excluding cash, marketable securities, and short-term debt.
EXHIBIT 2(conc/uded)

1974 1975 1976 1977 1978 1979 1980 1981 1982

Capital expenditures $ 1,008 $ 1,036 $876 $704 $714 $864 $1,297 $2,389 $3,195
Change in working
Capital a 561 (122) 20 243 341 438 17 2,046 (987)

Capital structure
Short-term debt $320 $ 540 $ 259 $ 229 s 258 $ 230 $393 $ 445 $319
6.5% 10.3% 4.6% 4.0% 4.2% 3.5% 5.5% 2.6% 1.9%
Long-term debt $ 793 $ 889 $1,282 $1,216 $ 1,058 $ 1,067 $1,068 '56,4G3 $ 5,702
16.2% 16.9% 2:3.0% 21.4% 17.4% 16.1% 14.9% 37.0% 33.8%
Equity $3,782 $3,835 $4,032 $4,315 $4,761 $5,312 $5,690 $10,458 $10,850
77.3% 72.8% 72.4% 74.6% 78.4% 80.4% 79.6% 60.4% 64.3%
Total capital $ 4,885 $5,264 $5,573 $ 5,780 $6,077 $6,609 $7,151 $17.306 $16,871
100.0% 100.0% 100.0% '100,('% 100.0% 100.0% 100.0% 100.0% 100.0%

Interest coverage 11.8 4.6 6.6 6.8 10.6 11.5 10.9 5.5 4.8
Bond rating
(senior debt) AAA AAA AAA AAA AAA AAA AAA AAA AAA

Source: Du Pant annual reports.

a Working capital investment is defined here as net wor king capital excluding cash, marketable securities, and short-term debt.
 EXHIBIT 3
Financial Data for Selected Chemical Companies, 1980 and 1982 (millions of dollars)

Du Pant Dow Chemical Monsanto Celanese

1980 1~82 1980 1982 1980 1982 1980 1982

Sales $13,652 $33,331 $10,626 $10,618 $6,574 $6,325 $3,348 $3,062

1O-year compound anneal sales

growth .ate 14.2% 22.5°/,) 18.7% 16.0% 12.8% 11.0% 12.4% 7.4%
1O-year compound annual EPS
growth rate 7.5% 2.9%. 19.9% 5.7% 8.3% 9.9% 8.9% 7.3%a

Net income $ 744 $894 $805 $399 $149 $352 s 122 $ (34)

Net income/ Sales 5.4% 2.7% 7.6% 3.8% 2.3% 5.6% 3.6% (1.1 )%
Return on total capital 10.9% 6.6%, 7.2% 7.9% 5.3% 8.3% 9.3% (0.3)%
Return on equity 13.1% 8.2% 18.1% 9.6% 5.5% 10.1% 11.2% (1.2)%
Dividend payout 58.1% 64.0% 36.2% 101.7% 86.6% 45.2% 42.7% 42.7% a

Stock price/EPS b 8.4 9.9 7.6 13.7 13.7 8.3 6.3 6.7 a

Market value/Book value b 109% 82.9G/o 138% ' 93.4% 72% 84.7% 67% 75.7%
DebtITotal capital 20.4% 35."1% 48.5% 42.7% 33.4% 24.5% 40.7% 42.9%

Interest coverage 10.9 -1.8 2.2 1.6 2.8 7.1 4.5 3.8 a
Bond rating (senior debt) AAA AA A A AA AA A BBB

Source: Moody's Investors Service.

a Celanese 1a-year compour.d annual EPS qrowth rate, dividend payout ratio, stock price/EPS. and interest coverage use 1981 instead of 1982.

o Market value/Book value and stock price IEPS are based on averaqe of year's high and low stock prices.
 ,
EXHIBIT 4
Bond Rc:ting Medians for 1979 -1981

AAA AA A BBB BB B

Industrial Corporations

Interest coverage 18.25 8.57 6.56 3.82 3.27 1.76

Total debt /Capitalization 17.04% 23.70% 30.41 % 38.62% 48.07% 58.77%

Electric Utilities

Interest coverage >4.00 3.25-4.25 2.50-3.50 <3.00

Total debt /Capitalization <45% 42-47% 45-55% >55%

Telephone Companies

Interest coverage >4.50 3.70-4.7:) 2.80-4.00 <3.00

Total debt / Capitalization <40% 40-48% 48-58% 58-64%

Source: Standard and Poor's Corporation.

 EXHIBIT 5
Return on Total Capital

::!sr-----------------------~
e L.:.:-""; ~,..,:
30 • t1u ~tltll

•. I,T~.•T

01----

c _

1\162

EXHIBIT 6
Financial Projections, 1983 -1987 (millions of dollars)

1883 1984 1q85 1986 1987

Sources of Funds
Net income $1,O()9 $1,196 $1,444 $1,591 £1,753
Depreci2tion 2,101 2,111 2,212 2,3g6 2,667
Funds from operations 3,110 3,307 3,656 3,987 4,420
f\:::.set'5said 600 600 600 0 0
Decrease in cash 199 (200) (200) (1SO) (150)
Other sources 74 135 135 135 135
Sources before new financing $3,983 $3,842· $4,191 $3,972 $4,405

Uses of Funds
Dividends $ 571 $ 658 $ 794 S8% $964
Capital expenditures 2,767 3,386 4,039 4,202 4,667
Increase in net working capital a 973 414 594 587 650
Other 10 10 10 10 10
Total uses $4,321 $4,468 $5,437 $5,695 $5,291
Net financing requirement $ 338 $ 626 $1,246 $1,723 $1,883

Sources Analysts' forecasts and casewriter's estimates.

Note: Assumptions are as follows: Sales are average of analysts' forecasts; average annual sales growth rate is 10%.
EBIT recovers to 8.1% of sales by 1985. Net working capital (excluding cash) equals13% of sales. Dividend payout
ratio is 55%, and no dividend reductions are allowed. Net fixed assets equal 40% of sales. Depreciation is 15% of net
fixed assets in the previous year.

a Net working capital excludes cash, marketable securities, and short-term debt.
 EXHIBIT 7
Debt Financing Costs and Volumes, 1970 -1982 (millions of dollars)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Gross New Bond Issues by Industrials

AAA debt $1,650 $ 2,875 $ 700 $ 800 $ 275 $ 1,550 $ 1,750 $ 1,852 $ 543
M debt 2.415 3,310 2,030 1,125 700 1,800 2,900 2,458 3,347
A debt 2,060 5,355 2,205 960 1,310 1,500 4,220 3,887 3,075
BBB debt 440 420 ~,010 445 210 0 345 0 1.357

Common and Preferred

Stock Issues
Cash offerings $9,200 $13,000 $13,100 $11,100 $7,400 $11,900 $B,300 $14,100 $14,600 $17,100 $28,600 $34.400 $38.700
Net a 6,800 13,500 13,000 9,100 4,300 10,500 10,300 6,800 (1,400) (1,900) 18,200 12.000 16.400
Cash offerings
by industrials 3,50U 3,200 3,100 1,500 '1.000 2,400 2,800 2,300 2,900 3,600 10,400 11,900 9.600

Maturity Distribution of New Debt Issues

Medium-term 43% 30% 16% 21% 30% 44% 55% 62%
Long-term 57 70 84 79 70 56 45 38

Interest Rates
gO-day commercial
paper 7.89% 5.12% 4.63% 8.11% 10.06°/J f3.41% 5.28% 5.45% 7.73% 10.72% 12.37% 15.15% 11.91%
New issue AAA debt. 8.39 7.39 7.10 7A2 8.57 8.70 8.15 7.88 8.63 ,9.39 11.74 14.30 14.14
New issue AAA-M
spread .26 .12 .10 .10 .20 .27 .17 .09 .14 .22 .44 .50 .38
New issue AAA-BB9
spread 1.35 1.07 .71 .75 1.67 2.57 1.44 .79 .81 1.12 1.95 2.09 1.87
S&P 500
price /earnings ratio 16.:5 18.0 18.0 13.4 9.4 10.8 10.4 9.6 8.2 7.1 8.4 8.5 10.4

Sources: Salomor Brothers Inc, Bankers Trust Company, and Standard and Poor's Corporation.

J Stock offerings less stock repurchases.

 EXHIBIT 8
Projected Financial Results under Two Financial Policy Alternatives, 1983 - 1987
(millions of dollars except per share data)

1987
with 20%
1983 1984 1985 1986 1987 Lower EBIT

40% Debt Scenario

Debt t Total capitalization 36.0% 37.1% 39.7% 40.0% 40.0% 40.0%

Interest coverage a 3.67 3.88 3.95 3.89 3.86 3.09

Earniups per share $4.20 $4.98 $6.02 $6.31 $6.62 $4.83

Dividends per share $2.38 $2.74 $3.31 $3.56 $3.64

Return on total capital 7.9% 8.6% 9.3% 9.3% 9.2% 7.4%

Return on equity 9.0% 10.1% 11.5% 11.5% 11.4% 8.3%

New equity issues $ 0 $ 0 $ 0 $ 704 $ 816 s 816

Millions of shares sold b 0 0 0 11.7 13.0 13.0

25% Debt Scenario

Debtt Total capitalization 33.8% 31.4% 28.2% 25:0% 25.0% 25.0\)/0

Interest coverage a 3.91 4.60 5.57 6.23 f1.17 4.94

.. ,
Earnings per share $4.13 $4.77 $5.41 $5.46 $5.60 $4.27
Dividends per share $2.29 $2.49 $2.71 $2.72 $2.72

Return on total capital 7.9% 8.6% 9.3% 9.3% 9.2% 7.4%

Return on equity 8.8% 9.8% 10.7% 10.4% 10.2% 7.8%

New eauity issues $398 $686 $1,306 $1,783 $1,271 $1,271

Millions of shares sold b 9.5 14.3 28.8 36.2 25.2 25.2

Sources: Analysts' forecast and casewriter's estimates, based on assumptions of Exhibit O.

a Interest coverage is defined as EBITt interest.

b Assumes new shares sold at a price - earnings ratio of 10.