In: Advanced Math
The Verbrugge Publishing Company’s 2019 balance sheet and income
statement are as follows (in millions of...
The Verbrugge Publishing Company’s 2019 balance sheet and income
statement are as follows (in millions of dollars):
Balance Sheet
Current assets Net fixed assets
Total assets
Income Statement
Net sales Operating expense
$300 200
$500
Current liabilities
Advance payments by customers
Noncallable preferred stock, $6 coupon, $110 par value
(1,000,000 shares)
Callable preferred stock, $10 coupon, no par,
$100 call price (200,000 shares)
Common stock, $2 par value (5,000,000 shares)
Retained earnings Total liabilities & equity
$ 40 80 110
200
10
60 $500
$540 516 $24 4 $28 7 $21 6 2 $13
Net operating income Other income
EBT
Taxes (25%)
Net income
Dividends on $6 preferred
Dividends on $10
preferred
Income available to common stockholders
(24-3)
Liquidation
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 $2.40 preferred with a
par value of $35 plus one 8% subordinated income debenture with a
par value of $75. The callable preferred issue will be retired with
cash generated by reducing current assets.
- 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 debt? For preferred stock?
- Construct the projected income statement. What is the income
available to common shareholders in the proposed recapitalization?
- 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 noncall- able preferred
stockholders after the reorganization? What was the net income to
common stockholders before the reorganization? After the
reorganization.
- 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?
- How is the debt ratio (i.e., liabilities/total assets) affected
by the reorganization? Suppose you treated preferred stock as debt
and calculated the resulting debt ratios. How are these ratios
affected? If you were a holder of Verbrugge’s common stock, would
you vote in favor of the reorganization? Why or why not?