Q4) Estimate Stone

Container's cash needs over

the next year if paper and
linerboard prices
remain at 1992 levels. Suppose
prices drop, so that revenues fall
by 10% from current levels, but
volumes remain the same. How
do your estimates change? What
if prices increase by 10%?
Assuming no change in working
capital, we have calculated cash
needs by estimating the free cash
flows and also considering
the obligations the company
has over the next year
taking into
consideration the price scenarios
mentioned in the question.
Cash charges such as deferred
taxes, net change in working
capital and foreign currency
transactions
are assumed to be zero.
COGS, SG&A, Interest,
Depreciation, etc have been
assumed at 1992 levels.
The cash needs as per 10%
increase and decrease in prices
are calculated as follows:
Q4) Estimate Stone Container’s cash needs over the next year if paper and
linerboard prices remain at 1992 levels. Suppose prices drop, so that revenues fall
by 10% from current levels, but volumes remain the same. How do your estimates
change? What if prices increase by 10%?
Assuming no change in working capital, looking at the financial statements of Stone
Container Cooperation from Exhibits 1 to Exhibits 4 we can calculate cash needs by
estimating the free cash flows and also considering the obligations that the company
has over the next year which is given on the last page of the Case.
Taking into consideration the price scenarios mentioned in the question.
 Cash charges such as deferred taxes, the net change in working capital and foreign
currency transactions are assumed to be zero. COGS, SG&A, Interest, Depreciation,
etc have been assumed at 1992 levels.
The cash needs as per 10% increase and decrease in prices and without any change
in prices are calculated as follows:

Income Statement
Particulars Without Any Change 10% Decrease in Revenue 10% Increase in Revenue
Net Sales 5520 4968 6072
COGS 4474 4474 4474
S, G&A 543 543 543
Depreciation 304 304 304
EBIT 199 -353 751
Interest 386 386 386
PBT -187 -739 365
PAT -187 -739 365
Free Cash Flows
PAT -187 -739 365
Interest 386 386 386
Depreciation 304 304 304
Capex 100 100 100
Free Cash Flows 403 -149 955
Cash Requirement As per the Case
Debt Repayment 416 416 416
Extension of Credit Facility 400 400 400
Interest Repayment 425 425 425
Final Cash Requirement 838 1390 286

As can be Seen in the Above Statements Stone will Require:

$838 Millions more cash if there was no change in the Revenues
$1390 Million if the Revenues Decreased and $286 Million if the Revenues increased.
Q2 How does Roger Stone's leadership of the company compare to that of his
predecessors? In general, would you judge his leadership to have been successful?
Why or why not?
Roger Stone’s leadership style – Broadly, Roger stone’s key strategies were
1. To undertake high leverage irrespective of economic conditions,
2. aggressive growth by way of acquisitions,
3. buying capacity from distressed producers as opposed to expensive new
capacity,
4. high-quality service at reasonable prices with minimal capital tied up in
inventory, and
 5. the early repayment of loans (this being a family policy over the years).
In the initial period, his strategy proved to be successful as the company was able to
quintuple its annual production capacity to 4.8 million tons at one-fifth the normal
cost of building new plants. However, there were some loose ends. The family’s
ownership share went on to reduce to touch 30%, and the balance sheet was stressed
with high levels of debt. When the market conditions remained favourable with
upswings in paper prices along with the first equity offering, Stone was able to
service his debts. However, with the company’s growing dependency on high-yield
debt (junk bonds) to refinance loans, liquidity dried up for the company when the
securities market witnessed a slump. A contagion effect followed, with the company
having to sell off $330 million of assets and 9 million shares for $175 million. There
were negligible cash reserves to meet debt obligations, resulting in increased fees to
refinance revolving credit lines with banks. Subsequently, Stone ended up with a
long-term debt outstanding of more than $4.1 billion.
While his strategy worked during decent market conditions, it fell apart when things
went south. This is a typical scenario of wrong-way risk, and his strategy did not
account for that. The very nature of the paper manufacturing industry is that it
exhibits pronounced price cycles. Moreover, this is amplified because the production
of paper is a capital-intensive process, and with easing demands, producers
generally cut prices. This clearly left the company exposed to periods of declining
activity. One of the turning points in the case, post which a flight of problems began
for the company was when Consolidated-Bathrust Inc. was acquired, the reason
being that the company found itself in an unending loop of debt transactions that
could not be refinanced easily. Complex securities like convertible exchangeable
preferred stock and interest rate swaps had to be issued with several other measures
to prevent default. All things considered; a comprehensive financial plan was
required in order to restore the company to some degree of financial stability