Campbell Company's balance sheet and income statement are shown below (in millions of dollars). The company and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the $4 preferred will be exchanged for one share of $1.50 preferred with a par value of $50 plus one 10 percent subordinated income debenture with a par value of $50. The $6 preferred issue will be retired with cash.

a. Construct the pro forma balance sheet after reorganization takes place. Show the new preferred at its par value.
b. Construct the pro forma income statement after reorganization takes place. How does the recapitalization affect net income available to common stockholders?
Income Statement
Current
Net sales ............................................600
Operating expense .............................550
Net operating income...........................50
Other income........................................10
EBT .....................................................60
Taxes (15%)............................................9
Net income ..........................................51
Dividends on $4 PS ..............................4
Dividends on $6 PS ...........................4.8
Income to Common SHs ...................42.2
c. What are the required pre-tax earnings before and after the reorganization?
d. Calculate the debt ratio before and after the reorganization?
e. Would the common stockholders be in favor of the reorganization? Why or whynot?

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Balance Sheet Current Current S 275 S 15 S4 preferred stock, S100 par value (1,000,000) shares 100 S6 preferred stock, no par, callable at 10 (800,000 shares S 8 Common stock, S0.50 par value (20,000,000) shares 10 S 37 S 445 Current Assets 250 Current liabilities Net fixed assets S 195 Advance payments Retained eanings Total assets 445 Total claims