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Tuesday, February 21: Stone Container Corporation (A)

a. Compare Roger Stone’s growth and financial strategies with those of his predecessors. b. Examine the sensitivity of Stone Container’s earnings and cash flow to the paper and linerboard pricing cycle. Assume sales volume of 7.5 million tons per year and a 35% marginal tax rate. What would be the effect of a $50 per ton price increase? Is such an industry-wide price increase plausible? c. What should be Stone Container’s financial priorities in 1993? d. Of the financing alternatives described in the case, which would be in the best interests of Stone’s shareholders? Which would be in the best interests of its high-yield debt holders? Which would be favored by its bank creditors?

1. What was the basis of Stone Container’s successful growth during its first fifty years?
What was the product market strategy? What was its financial strategy? How did Roger
Stone’s management of the company compare to that of his predecessors?
2. How sensitive are Stone Container’s earnings to the paper and linerboard pricing cycle?
Estimate the effect on earnings and cash flows of a $50 per ton industry-wide increase in prices. What if there were a $100 per ton industry-wide increase? In each case, assume
Stone Container’s sales volume approximates its1992 production level of 7.5 million tones per year -- while costs remain the same. Also assume a 35% tax rate.
3. What would be the effect under both these pricing scenarios if production and sales volume increased to full capacity of 8.3 million tons per year? For simplicity, assume costs per ton remain constant.
4. What should be Stone Container’s long-term financial strategy? What capital structure do you recommend?
5. Develop a financial plan for 1993 that relieves Stone of its immediate financial pressures, and puts it on a financially healthy

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