Stonequestions 1 
Stone Container Corporation
Questions for Class Discussion
Professor Amir Sufi
1. What factors about a firm’s business matter most for thinking about its capital structure? List a set of factors, and then discuss the business of Stone Container in the context of these factors.
Should Stone Container carry a lot of debt? Why or why not? I’m looking for a general response here, not specific to the current troubles the firm faces (that comes in Question 5).
2. How did Stone Container in the most recent years finance its acquisitions? How did the financial structure evolve after the acquisition was completed? Why might Stone Container finance acquisitions in such a manner, in the language of theories we covered in Class 2?
3. How sensitive are Stone Container’s earnings and cash flow to the paper and linerboard pricing cycle? Estimate the effect on earnings and cash flow of a $50 per ton industry-wide increase in prices. How about a $100 per ton industry-wide increase in prices? Assume Stone Container’s sales volume approximates its 1992 production level of 7.5 million tons per year, and costs remain the same. Also assume a 35% tax rate.
4. What would be 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)? 5. What problems does Stone Container currently face when it comes to its capital structure? How is the value of the firm being reduced? Be specific.
6. Of the various financing alternatives described at the end of the case, which would be in the best interest of Stone’s shareholders? Which would be in the best interests of its high-yield debt (i.e., junk bond) holders? Of its bank creditors? Which of the financing alternatives would you recommend Stone Container pursue in 1993? If you recommend more than one, which do you view as most important and why? Which would you do first, and which later? Make sure to call upon the theories
Questions for Class Discussion
Professor Amir Sufi
1. What factors about a firm’s business matter most for thinking about its capital structure? List a set of factors, and then discuss the business of Stone Container in the context of these factors.
Should Stone Container carry a lot of debt? Why or why not? I’m looking for a general response here, not specific to the current troubles the firm faces (that comes in Question 5).
2. How did Stone Container in the most recent years finance its acquisitions? How did the financial structure evolve after the acquisition was completed? Why might Stone Container finance acquisitions in such a manner, in the language of theories we covered in Class 2?
3. How sensitive are Stone Container’s earnings and cash flow to the paper and linerboard pricing cycle? Estimate the effect on earnings and cash flow of a $50 per ton industry-wide increase in prices. How about a $100 per ton industry-wide increase in prices? Assume Stone Container’s sales volume approximates its 1992 production level of 7.5 million tons per year, and costs remain the same. Also assume a 35% tax rate.
4. What would be 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)? 5. What problems does Stone Container currently face when it comes to its capital structure? How is the value of the firm being reduced? Be specific.
6. Of the various financing alternatives described at the end of the case, which would be in the best interest of Stone’s shareholders? Which would be in the best interests of its high-yield debt (i.e., junk bond) holders? Of its bank creditors? Which of the financing alternatives would you recommend Stone Container pursue in 1993? If you recommend more than one, which do you view as most important and why? Which would you do first, and which later? Make sure to call upon the theories