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 (2,000,000 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 $2.50 preferred with a par value of $33 plus one 8% subordinated income debenture with a par value of $77. The callable preferred issue will be retired with cash generated by reducing current assets.

1. 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	$
   			$2.50 preferred stock, $33 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

2. 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 $1.23 million should be entered as 1.23, 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 $2.50 preferred	$
   Income available to common stockholders	$

3. 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 $1.23 million should be entered as 1.23, 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 $1.23 million should be entered as 1.23, 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

4. 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 $1.23 million should be entered as 1.23, 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

5. 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: %