The Verbrugge Publishing Company’s 2019 balance sheet and incomestatement 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 $10preferred?Income available to common stockholders
(24-3)
Liquidation
Verbrugge and its creditors have agreed upon a voluntaryreorganization plan. In this plan, each share of the noncallablepreferred will be exchanged for 1 share of $2.40 preferred with apar value of $35 plus one 8% subordinated income debenture with apar value of $75. The callable preferred issue will be retired withcash generated by reducing current assets.
- Assume that the reorganization takes place and construct theprojected 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 incomeavailable to common shareholders in the proposed recapitalization??
- What were the total cash flows received by the noncallablepreferred stockholders prior to the reorganization? What were thetotal cash flows to the original noncall- able preferredstockholders after the reorganization? What was the net income tocommon stockholders before the reorganization? After thereorganization. ?
- Required pre-tax earnings are defined as the amount that isjust large enough to meet fixed charges (debenture interest and/orpreferred dividends). What are the required pre-tax earnings beforeand after the recapitalization? ?
- How is the debt ratio (i.e., liabilities/total assets) affectedby the reorganization? Suppose you treated preferred stock as debtand calculated the resulting debt ratios. How are these ratiosaffected? If you were a holder of Verbrugge’s common stock, wouldyou vote in favor of the reorganization? Why or why not? ?
