Question 5. (20 points) Kemper Company\'s balance sheet and income statement are
ID: 2600593 • Letter: Q
Question
Question 5. (20 points) Kemper Company's balance sheet and income statement are shown below (in millions of dollars). The company and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the $5 preferred will be exchanged for one share of $1.00 preferred with a par value of $25 plus one 9% subordinated income debenture with a par value of $75. The $9 preferred issue will be retired with cash. The company's tax rate is 30 percent.
Balance Sheet prior to Reorganization (in millions
Current Assets
400
Current liabilities
350
Net fixed assets
450
Advance payments
20
$5 preferred stock, $100 par value (1,000,000) shares
100
$9 preferred stock, no par, callable at 100 (160,000 shares)
30
Common stock, $0.10 par value (10,000,000) shares
50
Retained earnings
300
Total assets
850
Total claims
850
a. Construct the pro forma balance sheet after reorganization takes place. Show the new preferred at its par value.
b. Construct the pro forma income statement after reorganization takes place. How does the recapitalization affect net income available to common stockholders?
Balance Sheet prior to Reorganization (in millions
Current Assets
400
Current liabilities
350
Net fixed assets
450
Advance payments
20
$5 preferred stock, $100 par value (1,000,000) shares
100
$9 preferred stock, no par, callable at 100 (160,000 shares)
30
Common stock, $0.10 par value (10,000,000) shares
50
Retained earnings
300
Total assets
850
Total claims
850
Explanation / Answer
Balance sheet of Kemper company
After the reorganisation the profits for the share holders will decrease by 30 as it is transferred to capital redemption reserve for payment of preference shares
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Liabilities amount assets amount Common stock .01$ 50 net fixed assets 450 1$ preference share 25 current assets 400 Retained earnings 270 Capital redemption reserve 30 Debenture 75 Advance payment 20 Current liabilities 350 Total 820 total 820Related Questions
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