Corizon Company's balance sheet and income statement are shown below (in millions of dollars). Corizon and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the $5 preferred will be exchanged for one share of $2.00 preferred with a par value of $50 plus one 10% subordinated income debenture with a par value of $50. The $8 preferred issue will be retired with cash. The company's tax rate is 30%.

Balance sheet prior to reorganization (in millions)

current assets 200 current liabilities 175

net fixed assets 225 advance payments 10

$5 preferred stock, $100 par value (1,000,000) shares 100

$8 preferred stock, no par, callable at 100 (80,000shares) 8

common stock, $1.00 par value (5,000,000) shares 25

retained earnings 107

total assets 425 Total claims 425

a. Construct the pro forma balance sheet after reorganization takes place. Show the new preferred at its par value

Balance Sheet after Reorganization (in millions)

b. Construct the pro forma income statement after reorganization takes place. How does the recapitalization affect net income available to common stockholders?

Income Statement (in millions)
Prior to Reorganization			After Reorganization
Net sales	700.0
Operating expense	630.0
Net operating income	70.0
Other income	7.0
EBT	77.0
Taxes	23.1
Net income	53.9
Dividends on $5 PS	5.0
Dividends on $8 PS	0.6
Income to Common SHs	48.3

c. Calculate the required pre-tax earnings 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? Why or why not?