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 $2 preferred will be exchanged for one share of $1.00 preferred with a par value of $25 plus one 11% subordinated income debenture with a par value of $25. The $4 preferred issue will be retired with cash. The company's tax rate is 20 percent.

Balance Sheet prior to Reorganization
Current Assets	100		Current liabilities	90
Net fixed assets	112		Advance payments	5
			$2 preferred stock, $50 par value (1,000,000) shares	50
			$4 preferred stock, no par, callable at 50 (80,000 shares)	4
			Common stock, $0.10 par value (15,000,000) shares	13
			Retained earnings	50
Total assets	212		Total claims	212

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?

Prior to Reorganization
Net sales	700.0
Operating expense	630.0
Net operating income	70.0
Other income	7.0
EBT	77.0
Taxes	15.4
Net income	61.6
Dividends on $2 PS	5.0
Dividends on $4 PS	-
Income to Common SHs	56.6

c. Calculate the required pre-tax earnings to cover debt and preferred stock obligations, before and after the recapitalization?

d. Calculate the debt ratio before and after the reorganization?

e. Would the common stockholders be in favor of the reorganization? Explain your answer, providing at least 2 reasons for it.