Du Pont de Nemours and the Business Case Analysis When evaluating Du Pont's capital structure after the Conoco merger which significantly increased the debt/ company's net worth, an analyst must consider all the advantages and disadvantages of a high debt-to-GDP ratio. The main reason Du Pont ended up with a high debt-to-equity ratio after acquiring Conoco was due to the timing and price at which it purchased Conoco. Du Pont ended up buying the company at its peak, just before coal and oil prices began to fall and at a time when the economic recession hit Du Pont's chemical industry. The further response from Du Pont analysts and shareholders also forced Du Pont to think twice about their new expansion. The idea to bring the debt-to-GDP ratio back to 25% was prompted by the fact that the company believed that high levels of capital spending were vital to the success of the company and that high levels of debt could expose it to risk greater than insolvency. Persistently high spending on capital goods is the first reason why it is recommended to reduce the debt-to-equity ratio. A company with higher debt levels is less flexible in being able to adapt to new demands and market conditions that require the company to produce new products or respond to competition. Considering the pecking order of financing, issuing new shares to finance capital investments is a last resort, and a company that has high levels of debt must move to the equity side to avoid the risk of bankruptcy. Loan default occurs when rising costs or poor economic conditions cause the business to have less net income than payments on loans. The risk of default on loans and the direct and indirect costs associated with default lead companies to prefer lower levels of debt. Financial distress caused by additional leverage can lead to lower cash flows available to all investors than if the firm were financed only with equity. Additionally, the high debt-to-GDP ratio advocated by Du Pont caused them to move from a AAA bond rating to an AA bond rating. While the likelihood of defaulting on loans would be minimal, there are higher interest costs with a lower bond rating. The lower bond rating signals to investors that the firm is more likely to default than if it had a higher bond rating (AAA)..