The Verbrugge's Publishing Company's 2004 balance sheet and income statement are as follows (in millions of dollars). Verbrugge's 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 percent subordinated income debenture with a par value of $75. The $10.50 preferred issue will be retired with cash.

a. Construct the pro forma balance sheet assuming that reorganization takes place. Show the new preferred at its par value.

b. Construct the pro forma income statement. How much does the proposed recapitalization increase income available to common shareholders?

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?

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BALANCE SHEET $ 42 $168 Current liabilitics Current assets Net fixed assets Advance payments 153 78 Goodwill Rescrves 15 $6 preferred stock, $112.50 par value (1,200,000 shares) $10.50 preferred stock, no par, callable at $150 (60,000 shares) Coromon stock, $1.50 par value (6,000,000 shares) Retained camings 135 57 Total asscts Total claims $336 $336 INCOME STATEMENT Net sales $540.0 Opcrating expensc 516.0 $ 24.0 Net operacing incorme Other income 3.0 $ 27.0 EBT Тахсs (50%) 13.5 $ 13.5 Net income Dividends on $6 preferred 7.2 Dividends on $10.50 preferred 0.6 $ 5.7 Income available to common stockholders