Saving Troubled Stutts Corporation: Information Known Only to Evenson

2 Pages Posted: 23 Jun 2009

See all articles by Samuel E. Bodily

Samuel E. Bodily

University of Virginia - Darden School of Business

Abstract

This case, part of a series (see also UVA-QA-0712, UVA-QA-0713, and UVA-QA-0715), contains information known only to Evenson. Two individuals own all the capital in Stutts Corporation. Decker owns all the debt and Evenson owns all the equity. Unless Decker and Evenson supply workout loans, Stutts will become bankrupt immediately. If they do provide the loans, Stutts will go into three possible states: recover, restructure, liquidate. The payouts to Decker and Evenson differ in each state. The two parties have differing probabilities for these three states and differing budget limits for adding capital; probabilities and budgets are private, confidential information. Students playing each role will negotiate, in pairs, a deal for the additional financing of Stutts. Without state-contingent side payments and/or altered ownership arrangements, players cannot strike a deal that is good for both sides, based on their differing probabilities and budget constraints. Students will carry out a preliminary negotiation, discuss it in class, and then have a chance to conduct a final analysis, based on new ideas from class discussion.

Excerpt

UVA-QA-0714

SAVING TROUBLED STUTTS CORPORATION:

INFORMATION KNOWN ONLY TO EVENSON

Without the workout loans, it was widely known that all the equity in Stutts Corporation would be valueless. For Evenson, making his loan was potentially attractive as a way to save the company so that it could provide him a positive value, over and above the cost of the loan. Evenson could be throwing good money after bad, however, if Stutts went bankrupt and the loan money was also lost.

Evenson could contribute a total amount of capital not to exceed $ 25 million toward improving his position in Stutts, given the status of the rest of his portfolio. Therefore, if he put in the $ 10-million workout loan, this capital limit would imply that $ 15 million of additional capital could be made available (in end-of-year dollars).

Evenson had thought carefully about what would take place in the next year. It seemed to him that the most likely outcomes were for Stutts to recover or liquidate, and that the chances of each were the same. Restructuring was also possible, but he believed that Stutts was essentially in a make-or-break situation. He considered the likelihood of restructuring to be half that of the other two possibilities. Therefore, his probabilities for recovery, restructuring, and liquidation were 0.4, 0.2, and 0.4, respectively. In summary:

. . .

Keywords: decision analysis, negotiation, side payments, contingent contracts, BATNA, Pareto optimality

Suggested Citation

Bodily, Samuel E., Saving Troubled Stutts Corporation: Information Known Only to Evenson. Darden Case No. UVA-QA-0714. Available at SSRN: https://ssrn.com/abstract=1423300

Samuel E. Bodily (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4813 (Phone)
434-293-7677 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/bodily.htm

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