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Proposed Capital Structure for Du Pont Corporation

Proposed Capital Structure for Du Pont Corporation
The Du Pont Corporation was founded in 1802 to manufacture gunpowder. After nearly two centuries of operations, the company has greatly diversified its product base through acquisitions and research and development,, and is one of the largest chemical manufacturers in the world. In 1995, Du Pont had revenues of $42.2 billion and net income of $3.3 billion. In this same period, 50 percent of the company's sales were outside the United States. Du Pont operates in approximately 70 countries worldwide, with about 175 manufacturing and processing facilities that include 150 chemicals and specialties plants, five petroleum refineries, and 20 natural gas processing plants. The company has more than 60 research and development labs and customer service centers in the United States, and more than 20 labs in 10 other countries. Currently, Du Pont is the thirteenth largest U.S. industrial/service corporation (Fortune 500).

Until the 1960's, the company's capital structure had historically been very conservative, with the corporation carrying little debt (Figure 1). This was possible primarily because of the enormous success of the company. However, in the late 1960's, competition for Du Pont had increased considerably, and the company experienced decreased gross margins and return on capital

Figure 1. The capital structure of the Du Pont company from 1965 to 1982. The company had very little debt as late as 1965, but after the acquisition of Conoco, Du Pont changed to a considerably more leveraged capital structure.

During the 1970's, three primary variables combined to exert considerable financial pressure on Du Pont: (i) the company embarked on a major capital spending program designed to restore its cost position, (ii) the rise in oil prices increased costs and requirements for working capital, and (iii) the recession in 1975 had a dramatic impact on Du Pont's fiber business. The case analyzed in this report was written in 1982, at which time the company had a capital structure of approximately 36% debt (Figure 1). The company has ambitious research plans in the future, which require a considerable amount of externally generated capital for 1983 through 1987 (Table 1). Therefore, the company is seeking to develop and stick to a capital structure, which will support the company's research and development interests in these years and the decades to come.

Table 1. Financial Projections for 1983-1987, in millions of dollars.

An obvious solution for the company would be to reduce or eliminate dividend payments....

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