Monday, March 16, 2020
Du pont Co Essays
Du pont Co Essays Du pont Co Essay Du pont Co Essay However, between 1969 a ND 1972, an new environmental protection legislation was enacted and quire the company that use sulfate to spend more on produced wastes. Meanwhile, retile ore, the feedstock of chloride process, also in shortage, which cause the increase Of the price Of retile ore. The increasing cost on both processes will cause the price oft to increase. Meanwhile, the De valuation of US dollars will also affect the import. Under this market change, all companies that produce Tie would focus more on developing the limonite process or improving other two processes to be more environmentally friendly and profitable. The main weakness of Du Points competitors, also the main strength of Du Pont, is that Du Pont is the only company that has the operational knowledge to make production economically viable. Moreover, the main competitor of Du Pont, NIL industry, was less profitable than Du Pont and rely more on debt to finance its growth. Therefore, NIL industry is more financially sensitive to market change than Du Pont is. Also, because Tie is the second smallest division of Du Points total sales, the market change of Tie market will not affect too much on its earnings while NIL rely on Tie for almost one quarter of its total sales. 2. Maintain strategy: The main advantages of maintain strategy is that the capital expenditure will be much less than growth strategy does. Therefore, the company will perform well on its balance sheet and income statement by decreasing its debt. The main disadvantages of maintain strategy is that the market share will maintain 45% in the future and will not grow continuously. This will limit the total capacity it produced and its futz ere development. 3. Growth strategy: The main advantage of growth strategy is that it will increase the market share of Tie production rapidly and its total capacity. Due to the increasing need oft in the future, this will help the company to gain more profits and be able to finance its capital expenditure. Moreover, other division of Du Pont and its investments on financial market are also able to help the Tie and pigment division to provide necessary fund in early period. Also, by exercising three tactics of the strategy, especially limit the licensing of limonite chloride process to Its competitor, the company is able to limit its competitors production and expansion. The main disadvantage of growth strategy is that the capital expenditure would reach 500 million dollars in 1985 and there is risk that the pigment division cannot finance such a high expense during its expansion. 4. The main reason for Du Pont to lower the price of Tie if choosing growth strategy is that it is an efficient way to gain market shares faster than other company. By lowering the pence, 3 pigment that made by Tie would be more attractive than other companies. Therefore, the total capacity of Tie will increase rapidly and would help the growth of Du P onto Company. 5. 4 5 6. 6 Terminal value in 1984 of maintains strategy is calculated as cash flow o firm in 1985 / (cost of capital growth rate). According to the spreadsheet, the cash flow to firm in 1985 is 21. 14. The cost Of capital is 12%. According to the note of Exhibit 4, the demand oft is growing at a rate of 3%. However, it is not considered to be very sensitive to price. In this case, the sales and cash flow should also grow at a rate of 3%. Therefore, the terminal value in 1984 equals to 21. 14/ ( 234. 89 Terminal value in 1984 of growth strategy is calculated as the same as of terminal value. According to the spreadsheet, the cash flow to firm is 56. 73. The cost of capital is 12%. The annual growth rate is 3%. Therefore, the terminal value in 1984 equals to 630. 33. 7. For calculating the rate of return of growth strategy, we decide to use the incremental capital expenditure on new capacity as the initial investment. Because it is a well managed, high profits company and has a high longer AAA bond rating; we also decide to use the return rate of AAA corporate bonds as the discount rate, which is 7. 2%. The initial investment could be calculated by using UP of incur mental capital expenditure on new capacity from 1973 to 1985, which equals to 185. 93. By calculating the UP of incremental cash flow from 1973 to 1985, we have the discounted cash flow, which is 12. 13. 12. 13 also represents the NAP of growth strategy. By using the equation of NAP INITIAL INVESTMENT+CB/AIR, the AIR is equal to 6. 52%. For calculating the rate of return of maintain strategy, we using the same method as the growth strategy did. The Initial investment is 111. 56. The discounted cash flow is 7. 97. 7. 97 is also represents the NAP of maintain strategy. Of NAP = INITIAL INVESTMENT+CB/AIR, the AIR is equal to 7. 14%. 7 8 By using the equation When evaluating the maintain strategy and growth strategy, we find out that the maintain strategy is more risky than growth strategy. The AIR by using maintain strategy, which is 7. 14% , is higher than AIR of growth strategy, which is 6. 52% . However, because the NAP of growth strategy (12. 13) is much higher than maintain strategy (7. 97) , we cannot use only AIR to determine which strategy is more risky. By considering that the NAP of growth strategy is 12. 13 , the growth strategy is more attractive. Also, the cash flow of growth strategy generated is also higher than maintain strategy, which means that the fund of growth strategy is more liquid than maintain strategy. In this case, although using growth strategy could cause temporary lack of operating fund, it is an efficient strategy for company to gain more market shares and benefits the company in long terms. According to exhibit 1 , it also performs well on rate of return on equity before 1972, which has more than 10% annually. It indicates that Du Pont is able to finance the increasing capital expenditure by using its profits in previous years. In this case, growth strategy is the best strategy for the company to ad opt.