Longview Manufacturing Company (LMC) and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the noncallable preferred will be exchanged for 2 shares of $1.25 preferred with a par value of $20 plus one subordinated income debenture with an 8% coupon and a par value of $80. The callable preferred issue will be retired with cash generated by reducing current assets. The 2021 balance sheet and income statement are as follows (in millions of dollars).

Balance Sheet

Current assets $360 Current liabilities $90

Net fixed assets $300 Advance payments by customers $100

Noncallable preferred stock, $6 coupon, $120 par value (1,000,000 shares) $120

Callable preferred stock, $10 coupon, no par, $100 call price (200,000 shares) $200

Common stock, $2 par value (5,000,000 shares) $10

Retained earnings $140

Total assets $660 Total liabilities & equity $660

Income Statement

Net sales $600

Operating expense $520

Net operating income $80

Other income $6

EBIT $86

Interest expense $0

EBT $86

Taxes (25%) $22

Net income $65

Dividends on $6

preferred $6

Dividends on $10

preferred $2

Income available to common stockholders $57

a. Assume that the reorganization takes place, and construct the projected balance sheet; show the new preferred stock at its par value. What is the value for total assets? For debt? For preferred stock?

b. Construct the projected income statement. What is the income available to common shareholders in the proposed recapitalization?

c. What were the total cash flows received by the noncallable preferred stockholders prior to the reorganization? What were the total cash flows to the original noncallable preferred stockholders after the reorganization? What was the net income to common stockholders before the reorganization? After the reorganization?

d. Required pre-tax earnings are defined as the amount that is just large enough to meet fixed charges (debenture interest and/or preferred dividends). What are the required pre-tax earnings before and after the recapitalization?

e. How is the debt ratio affected by the re-organization? Suppose you treated preferred stock as debt and calculated the resulting debt ratios. How are these ratios affected? If you were a holder of LMC's common stock, would you vote in favor of the reorganization? Why or why not?