Case Analysis of Du Pont de Nemours and the Company When Evaluating the Capital Structure of Du Pont After the Conoco Merger which has significantly increased the company's debt-to-equity ratio, an analyst must look at all the pros and cons of a high debt-to-equity ratio. The main reason Du Pont ended up with a high debt ratio after acquiring Conoco was due to the timing and price at which they purchased Conoco. Du Pont ended up buying the company at its peak, just before coal and oil prices began to decline and at a time when economic recession hit Du Pont's chemical industry. The additional response from Du Pont analysts and shareholders also forced Du Pont to think twice before further expansion. The idea of ​​reducing the debt ratio to 25% arose from the company's understanding that high levels of capital expenditure were essential to the success of the company and that high levels of debt could expose yourself to a higher risk of payment default. Consistently high spending on capital goods is the first reason one would recommend reducing the debt-to-equity ratio. A company with higher debt levels is less flexible in adapting to new demands and market conditions that require the company to produce new products or respond to competition. When it comes to the pecking order of financing, issuing new shares to finance capital investment is the last resort and a company that has high debt levels should move to the equity side to avoid risk of bankruptcy. Defaults occur when increasing costs or poor economic conditions lead the business to have less net income than loan payments. The risk of default and the direct and indirect costs of default lead companies to prefer lower debt levels. Financial distress caused by additional leverage can result in lower cash flow available to all investors than in a company financed solely by equity. Additionally, the high debt ratio that Du Pont took on also caused it to move from an AAA bond rating to an AA bond rating. Although the likelihood of not being able to obtain loans is minimal, interest costs increase with lower bond ratings. Lower bond ratings signal to investors that the company is more likely to default than if it had a higher bond rating (AAA)..