Executive SummaryDuPont is known for its low reliance on loans. In the 1970s the company had to take on a substantial portion of the debt of Conoco, a newly acquired company. In 1983, managers must decide what the optimal future target debt ratio will be. Should the company continue to keep around 40% of its assets financed through debt or should it look to reduce its borrowings to 25%? We have defined several criteria to determine our choice: return, risks and other quantitative and qualitative factors. Aiming for a debt-to-GDP ratio of 40% will maximize the value of the company. Higher earnings per share and dividend per share will lead to a higher stock price in the future. Due to leverage, the return on equity is higher because debt is the main source of financing capital expenditures. To maintain the debt-to-GDP ratio at 40%, no equity issues will be declared until 1985. DuPont will finance the necessary funds through debt. Minimum equity funds will be issued from 1986 onwards. It will be timed to take advantage of favorable market conditions. The remainder of the requested financing will be acquired through debt issuance. Case Background DuPont is a very large company with a low debt policy designed to maximize financial flexibility and insulate operations from financial constraints. It is one of the few AAA-rated manufacturing companies as its investments are financed primarily from internal sources. However, as prices fell in the 1960s, DuPont's net profit also fell. The adverse economic conditions of the 1970s increased inflation: the increase in oil prices increased the investments in inventories required by the company. The 1975 recession negatively affected DuPont's net income by 33%, and its return on equity and earnings per share declined. The company cut its dividend in 1974 and removed working capital investments. The debt ratio increased from 7 percent in 1972 to 27 percent in 1975, and interest coverage fell from 38 to 4.6. The company perceived a temporary increase in debt, but moved quickly to reduce its debt-to-GDP ratio by decreasing capital expenditures. The debt ratio fell to 20%, interest coverage increased to 11.5 in 1979. In 1981, DuPont issued $3.9 billion in common stock, $3.85 billion in debt, and assumed 1.9 billion dollars of Conoco debt to acquire Conoco. DuPont's debt-to-GDP ratio increases to 42%, its interest coverage rises to 5.5, and its credit rating is downgraded to AA. In 1982, the merger with Conoco showed little results. DuPont also lowered its debt-to-GDP ratio to 36% due to asset sales, but interest coverage fell to 4.