Question

In: Accounting

Reorganization The Verbrugge Publishing Company's 2016 balance sheet and income statement are as follows (in millions...

Reorganization

The Verbrugge Publishing Company's 2016 balance sheet and income statement are as follows (in millions of dollars).

Balance Sheet
Current assets $168 Current liabilities $42
Net fixed assets 153 Advance payments 78
Goodwill 15 Reserves 6
$6 preferred stock, $112.50 par value (1,200,000 shares) 135
$10.50 preferred stock, no par, callable at $150 (60,000 shares) 9
Common stock, $1.50 par value (6,000,000 shares) 9
Retained earnings 57
Total assets $336 Total claims $336
Income
Net sales $540.0
Operating expense 516.0
Net operating income $ 24.0
Other income 3.0
EBT $ 27.0
Taxes (50%) 13.5
Net income $ 13.5
Dividends on $6 preferred 7.2
Dividends on $10.50 preferred 0.6
Income available to common stockholders $ 5.7

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 $2.90 preferred with a par value of $36.50 plus one 8% subordinated income debenture with a par value of $76. The $10.50 preferred issue will be retired with cash.

  1. Construct the projected balance sheet while assuming that reorganization takes place. Show the new preferred stock at its par value. Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
    The projected balance sheet (in millions of dollars) follows:
    Current assets $    Current liabilities $
    Net fixed assets $    Advance payments $
    Goodwill $ Reserves $
             Subordinated debentures $
    $2.9 preferred stock, $36.5 par value (1,200,000 shares) $
          Common stock, $1.50 par value (6,000,000 shares) $
             Retained earnings $
    Total assets $    Total claims $

  2. Construct the projected income statement. What is the income available to common shareholders in the proposed recapitalization? Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. 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 expense $
    EBT $
    Taxes (50%) $
    Net income $
    Dividends on $2.90 preferred $
    Income available to common stockholders $

  3. 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? Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
    The required pre-tax earnings before recapitalization $  million
    The required pre-tax earnings after recapitalization $  million

  4. How is the debt ratio affected by the reorganization? Round your answers to two decimal places.
    The debt ratio before reorganization %
    The debt ratio after reorganization %

Solutions

Expert Solution

1. The projected balance sheet (in millions of dollars)

Current assets 159    Current liabilities 42
Net fixed assets 153    Advance payments 78
Goodwill 15 Reserves 6
         Subordinated debentures 91.2
$2.9 preferred stock, $36.5 par value (1,200,000 shares) 43.8
      Common stock, $1.50 par value (6,000,000 shares) 9
         Retained earnings 57
Total assets 327    Total claims 327

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

Net sales 540
Operating expense 516
Net operating income 24
Other income 3
EBIT 27
Interest expense 7.3
EBT 19.7
Taxes (50%) 9.85
Net income 9.85
Dividends on $2.90 preferred 3.48
Income available to common stockholders 6.37

3. The required pre-tax earnings before and after the recapitalization

The required pre-tax earnings before recapitalization $ 15.6 million
The required pre-tax earnings after recapitalization $ 14.26 million

4. How is the debt ratio affected by the reorganization

The debt ratio before reorganization - 0%

The debt ratio after reorganization - 27.89%

Formula: Debt Ratio = Total Debt/Total Assets


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