duPONT’S BOND RATING: IS IT OPTIMAL?

Case: E. I. du Pont de Nemours and Company (1983)

Finance 522 Professor Jim Gentry

Based on your analysis of the DuPont Case and your understanding of optimal
capital structure presented in Note on the Theory of Optimal Capital Structure, please
answer the following questions:

Questions

1. Using Exhibit 2 in the DuPont case, please compare DuPont’s bond rating
vis-a vis its D/V in 1965 to its bond rating & D/V in 1980. What is your
interpretation of why the bond rating remained constant at a AAA, but the
D/V ratio increased from 1.5 percent in 1965 to nearly 30 percent in 1980?

2. In page 2 of Exhibit 2 in the Note on the Theory of Optimal Capital Structure,

what percent of D/V would you associate with a AAA bond rating?

3. Using the data in Exhibit 7 in the DuPont case, how can DuPont be assured
of access to the capital markets in 1983?

4. What are signs indicating that DuPont’s debt ratio (D/V) has gone too far in
the judgment of the large rating agencies—Moody’s and Standard and
Poor’s?

5. What actions can a company take in trying to retreat from a D/V ratio that
has gone too far?