Reorganization

The Verbrugge Publishing Company's $2019$ balance sheet and income statement are as follows $($in millions of dollars$).$

Balance Sheet

Current assets $$300$ Current liabilities $ $40$

Net fixed assets $200$ Advance payments by customers $80$

Noncallable preferred stock, $$6$ coupon,

$$110$ par value $(1,000,000$ shares$)110$

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 $60$

Total assets $$500$ Total liabilities & equity $$500$

Income Statement

Net sales $ $540$

Operating expense $516$

Net operating inome $ $24$

Other income $4$

EBT $ $28$

Taxes $(25\%)7$

Net income $ $21$

Dividends on $$6$ preferred $6$

Dividends on $$10$ preferred $2$

Income available to common stockholders $ $13$

Verbrugge and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the noncallable preferred will be exchanged for $1$ share of $$2\mathrm{.}20$ preferred with a par value of $$34$ plus one $9\%$ subordinated income debenture with a par value of $$76.$ The callable preferred issue will be retired with cash generated by reducing current assets.

a$.$ Assume that the reorganization takes place and construct the projected balance. Show the new preferred stock at its par value. What is the value for total assets? For preferred stock? Enter your answers in millions. For example, an answer of $$1$ million should be entered as $1,$ not $1,000,000.$ Round your answers to the nearest whole number.

The projected balance sheet $($in millions of dollars$)$ follows:

Current assets $ Current liabilities $

Net fixed assets $ Advance payments by customers $

Subordinated debentures $

$$2\mathrm{.}20$ preferred stock, $$34$ par value

$(1,000,000$ shares$)$ $

Common stock, $$2$ par value

$(5,000,000$ shares$)$ $

Retained earnings $

Total assets $ Total liabilities & equity $

What is the value for debt $($i$.$e$.,$ liabilities$)?$ Do not treat preferred stock as debt. Enter your answer in millions. For example, an answer of $$1$ million should be entered as $1,$ not $1,000,000.$ Round your answer to the nearest whole number.

$ million

b$.$ Construct the projected income statement. What is the income available to common shareholders in the proposed recapitalization? Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $$1\mathrm{.}23$ million should be entered as $1\mathrm{.}23,$ not $1,230,000.$ Round your answers to two decimal places.

The projected income statement $($in millions of dollars$)$ follows:

Net sales $

Operating expense $

Net operating income $

Other income $

EBIT $

Interest $

EBT $

Taxes $(25\%)$ $

Net income $

Dividends on $$2\mathrm{.}20$ preferred $

Income available to common stockholders $

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? Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $$1\mathrm{.}23$ million should be entered as $1\mathrm{.}23,$ not $1,230,000.$ Round your answers to two decimal places.

Total cash flow to noncallable preferred stockholders before recapitalization: $ million

Total cash flow to noncallable preferred stockholders after recapitalization: $ million

What was the net income to common stockholders before the reorganization? After the reorganization. Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $$1\mathrm{.}23$ million should be entered as $1\mathrm{.}23,$ not $1,230,000.$ Round your answers to two decimal places.

Net income to common stockholders before recapitalization: $ million

Net income to common stockholders after recapitalization: $ million

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? Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $$1\mathrm{.}23$ million should be entered as $1\mathrm{.}23,$ not $1,230,000.$ Round your answers to two decimal places.

Required pre$-$tax earnings before recapitalization: $ million

Required pre$-$tax earnings after recapitalization: $ million

e$.$ How is the debt ratio $($i$.$e$.,$ liabilities$/$total assets$)$ affected by the reorganization? Round your answers to two decimal places.

Debt ratio before reorganization: $\%$

Debt ratio after reorganization: $\%$

Suppose you treated preferred stock as debt and calculated the resulting debt ratios. How are these ratios affected?

Debt ratio before reorganization: $\%$

Debt ratio after reorganization: $\%$

If you were a holder of Verbrugge's common stock, would you vote in favor of the reorganization? Why or why not?

$-$Select$-$YesNoItem $33,$ because $(1)$ earnings to shareholders