In: Accounting
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.
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 | $ |
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 | $ |
The required pre-tax earnings before recapitalization | $ million |
The required pre-tax earnings after recapitalization | $ million |
The debt ratio before reorganization | % |
The debt ratio after reorganization | % |
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