[Financial Restructuring Issues] The EnCal Corporation is a small, West Coast-based power company specializing in power generation methods that use clean-burning fuels and renewable natural resources. However, due to a complex and confusing power-pricing structure, EnCal is reeling from the aftereffects of the state government's attempt at power deregulation. EnCal has been unable to pass its operating costs onto its consumers. To make matters worse, EnCal has recently completed construction of several power production centers in efforts to double its capacity and to help diminish the frequency of power outages that are wreaking havoc on local commerce. As a result, it has accumulated a massive debt load to help finance these facilities and is on the verge of default. However, raising the prices of the power it supplies to its consumers involves a slow and laborious bureaucratic process and regulatory approval. EnCal is forced to reorganize its financing. EnCal's partial income statements and balance sheets for the 2015 and 2016 fiscal years follow. An incomplete income statement for 2017 is also provided.

A financial restructuring that would reduce EnCal's debt burden has been proposed. The proposal is to reduce the interest rate on its bank loan to 6 percent and loan principal to $100 million, to reduce the interest rate on its mortgage loans to 8 percent, and to replace all of its subordinated loan balance with a 50 percent equity stake in the company.

A.Assuming a 25 percent increase in revenue with no additional capital investment, what will EnCal's new income statement and balance sheet look like in the business as usual and financial restructuring scenarios?

B.Will EnCal be able to service its debt under either scenario?

C.Would EnCal be a likely candidate for Chapter 7 bankruptcy?

INCOME STATEMENTS ($MILLIONS)201520162017

Revenue$240$360?

COGS (70% in 2015, 80% in 2016/2017)-168-288?

Gross profit7272?

SG&A-30-35-35

EBITDA4237?

Depreciation-20-30-40

EBIT227?

Interest-22-92?

Earnings before taxes00?

Taxes (40%)00?

Net income$0$85?

BALANCE SHEETS ($MILLIONS)

Assets

Cash$10$10

Accounts receivable2030

Inventories 1015

Fixed assets, net5101080

Total Assets$550$1,135

Liabilities and Equity

Accounts payable$14$24

Notes payable (8% bank loan)50140

Accrued liabilities (wages and taxes) 44

Long-term mortgage loans (10%)180460

Long-term subordinated loans (12%)0290

Common stock300300

Retained earnings2-83

Total liabilities and equity$550$1,135