In general, how should a firm determine its appropriate capital structure? 1) What impact does leverage have on the prospects and performance of a company? 2) What problems arise from employing too much debt? Too little debt? 3) What indications does a firm have that its leverage is too high? Too low? 4) What issues relating to competitive strategy arise in the determination of capital structure policy? 5) What factors are responsible for differences in debt ratios for firms in different industries? For firms in the same industry? Analyze Du Pont's financing policy:
How much external funds will Du Pont have to raise in the near future?
What is driving this need for external financing?
Why is a financing policy important to Du Pont?
Why should a firm have a capital structure policy, i.e., a target debt ratio? Analyze Du Pont's bond rating:
Why is a AAA rating important to Du Pont? How and why did Du Pont keep its AAA rating in 1975?
Why did Du Pont abandon its AAA debt-rating policy? What were the consequences? What is the role of bond ratings?
Compare and contrast the two debt policy alternatives outlined in case Exhibit 8 for 1987. What bond rating would Du Pont receive under each option using the data in Exhibit 8 and Exhibit 4? How would its financial performance, financing needs, access to capital, and financial risk differ under the two alternative debt policies?
How are the issues of bond rating and target debt ratio related in the case of Du Pont? Du Pont's capital structure policy:
What capital structure policy should the company adopt now? What issues should it consider? (It is the last but the most important question.)