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Verbrugge and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the $6 preferred will be exchanged for one share of $2.40 preferred with a par value of $37.50 plus one 8% subordinated income debenture with a par value of $75. The $10.50 preferred issue will be retired with cash.

A. Construct the projected balance sheet while assuming that reorganization takes place. Show the new preferred stock at its par value.

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

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

D. How is the debt ratio affected by the reorganization? If you were a holder of Verbrugge s common stock, would you vote in favor of the reorganization? Why or why not?

Answers

a. Total assets: $327 million.

B. Income: $7 million.

C. Before, $15.6 million; After, $13.0 million.

D. Before, 35.7%;After, 64.2%.

The Verbrugge Publishing Company's 2012 balance sheet and income statement are as follows (in millions of dollars) Balance Sheet Current assets Net fixed assets Goodwill $168 153 15 Current liabilities Advance payments Reserves $ 42 78 135 $6 preferred stock, $112.50 par value (1,200,000 shares) $10.50 preferred stock, no par, callable at $150 (60,000 shares) Common stock, $1.50 par value (6,000,000 shares) Retained Total claims earnings Total assets Income Statement Net sales Operating expense $336 $336 Net operating income Other income EBT Taxes (50%) Net income Dividends on $6 preferred Dividends on $10.50 preferred Income available to common stockholders $540.0 516.0 $ 24.0 3.0 $27.0 13.5 $ 13.5 7.2 0.6 $ 5.7