The Verbrugge Publishing Company's 2018 balance sheet and incomestatement 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 (60,000shares) | 9 |
| | | Common stock, $1.50 par value (6,000,000 shares) | 9 |
| | | Retained earnings | 57 |
| Total assets | $336 | | Total claims | $336 |
| Income Statement | |
| 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 voluntaryreorganization plan. In this plan, each share of the $6 preferredwill be exchanged for one share of $2.30 preferred with a par valueof $35.50 plus one 7% subordinated income debenture with a parvalue of $77. The $10.50 preferred issue will be retired withcash.
- Construct the projected balance sheet while assuming thatreorganization takes place. Show the new preferred stock at its parvalue. Enter your answers in millions. For example, an answer of$1.23 million should be entered as 1.23, not 1,230,000. Round youranswers 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 | $ |
| | | $2.3 preferred stock, $35.50 par value (1,200,000 shares) | $ |
| | | Common stock, $1.50 par value (6,000,000 shares) | $ |
| | | | Retained earnings | $ |
| Total assets | $ | | Total claims | $ |
- Construct the projected income statement. What is the incomeavailable to common shareholders in the proposed recapitalization?Enter your answers in millions. For example, an answer of $1.23million should be entered as 1.23, not 1,230,000. Round youranswers 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 $2.30 preferred | $ |
| Income available to common stockholders | $ |
- Required earnings is defined as the amount that isjust enough to meet fixed charges (debenture interest and/orpreferred dividends). What are the required pre-tax earnings beforeand after the recapitalization? Enter your answers in millions. Forexample, an answer of $1.23 million should be entered as 1.23, not1,230,000. Round your answers to two decimal places.
The required pre-tax earnings before recapitalization:$ million
The required pre-tax earnings after recapitalization:$ million
- How is the debt ratio affected by the reorganization? Roundyour answers to two decimal places.
The debt ratio before reorganization: %
The debt ratio after reorganization: %
If you were a holder of Verbrugge's common stock, would you votein favor of the reorganization? Why or why not?
-Select-YesNoItem 28 , because (1) earnings to shareholders are-Select-increaseddecreasedItem 29 , (2) earnings required to coverfixed charges (including preferred dividends) are-Select-increaseddecreasedItem 30 , and (3) income debentures are-Select-lessmoreItem 31 risky to the shareholders than preferredstock.
