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Stone Container's Growth and Capital Strategy

Stone Container's successful early growth was based on focusing on a few core products and maintaining low debt levels. However, under Roger Stone's leadership the company took on increasing debt to diversify and acquire other companies, both vertically integrated and not. This increased leverage weakened the company's financial stability compared to prior leadership that emphasized maintaining low debt. To improve its financial position, Stone Container should pursue financing alternatives like issuing more equity and reducing dividends to deleverage its capital structure, which currently has a high debt to equity ratio of 3.77. Issuing more stock is recommended as the most important first step to improve the company's cash position and balance sheet strength.

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Charul Chadha
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65 views1 page

Stone Container's Growth and Capital Strategy

Stone Container's successful early growth was based on focusing on a few core products and maintaining low debt levels. However, under Roger Stone's leadership the company took on increasing debt to diversify and acquire other companies, both vertically integrated and not. This increased leverage weakened the company's financial stability compared to prior leadership that emphasized maintaining low debt. To improve its financial position, Stone Container should pursue financing alternatives like issuing more equity and reducing dividends to deleverage its capital structure, which currently has a high debt to equity ratio of 3.77. Issuing more stock is recommended as the most important first step to improve the company's cash position and balance sheet strength.

Uploaded by

Charul Chadha
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

1. a. What was the basis of Stone Containers successful growth during its first fifty years?

Stone was focused on a few products & keep low debt


b. What was its product market strategy?
Diversify & vertically integrated
c. What was its financial strategy?
Keep as low debt as possible. They always kept in mind the bust cycle years , since they had
seen the great depression.
d. How does Roger Stone's leadership of the company compare to that of his predecessors?
a. In general, would you judge his leadership to have been successful?
Take on more and more debt to buy new companies. In some cases they were
vertically integrated but not all cases.

b. Why or why not?

2. Analyze Stone's present capital structure (i.e., the composition and mix of debt and equity
securities used to finance the companys operations.)

a. Current Debt to equity ratio is 3.77 for 1992 ( see spread sheet total liabilities $4.5 B total
equity is $1.2 B )

What mix of debt and equity would be best (or optimal) for Stone Container?
b. Optimum level of debt to equity should be 1:1 i.e. The equity needs to increase by $3B
Where is Stone today relative to its optimal capital structure?
c. It is highly leveraged.

3. Estimate Stone Container's cash needs over the next year assuming that paper and linerboard
prices remain at 1992 levels. Suppose prices increase, so that revenues increase by 10% from
current levels, but volumes remain the same. How do your estimates change? What if prices
decrease by 10%?

See the spread sheet, it will be $70 m plug required vs $7 m plug required

4. What is the impact of each financing alternative on Stone's cash surplus or shortfall? What is the
impact of each on Stone's capital structure? Which financing alternatives would you recommend
that Stone pursue? If you recommend more than one, which do you view as the most important
and why? Which would you do first and which later?

Issue more stock and give up on the dividents

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