4.The Verbrugge Publishing Company\'s 2010 balance sheet and income statement ar

Question

4.The Verbrugge Publishing Company's 2010 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 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 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 $39.00 plus one 7% subordinated income debenture with a par value of $73.5. The $10.50 preferred issue will be retired with cash. a. Construct the pro forma balance sheet while assuming that reorganization takes place. Show the new preferred 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 pro forma balance sheet (in millions of dollars) follows: Current assets $ ________ Current liabilities $ ________ Net fixed assets $ ________ Advance payments $ ________ Goodwill $ ________ Reserves $ ________ Subordinated debentures $ ________ $2.9 preferred stock, $39 par value(1,200,000 shares) $ ________ Common stock, $1.50 par value (6,000,000 shares) $ ________ Retained earnings $ ________ Total assets $ ________ Total claims $ ________ b. Construct the projected income statement. 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 pro forma 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 $ ________ c. 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

Explanation / Answer

a. BALANCE SHEET Current Assets 159 Net Fixed Assets 153 Goodwill 15 Total Assets 327 b. INCOME STATEMENT Net Sales 540 Operating expense -516 Net Operating Income 24 Other Income 3 EBT 27 Taxes (50%) 13.5 Net Income 13.5 Dividends on $2.40 Stock 2.88 Interest on 8% Debenture 7.2 Net Income (for Shareholders) 3.42 c. BEFORE CAPITALIZATION Charges $6 Stock 7.2 $10.40 Stock 0.6 $2.40 Stock 0 8% Debenture 0 Pre-Tax Earnings required 7.8 d. BEFORE Equity 9,000,000 Debt: $6 Preferred Stock 135,000,000 $10.5 Preferred Stock 9,000,000 $2.40 Preferred Stock 8% Debenture Debt-Equity Ratio 16 The debt ratio is a measure of how levered a company is with respect to debt. From the The debt ratio is a measure of how levered a company is with respect to debt. From the table above the debt-equity ratio decreased. This is favorable for equity holders because the potential of claim, which debt holders have on income, has reduced. It would be wise to vote for the re-organization. ALANCE SHEET Current Liabilities 42 Advance payments 78 reserves 6 $2.40 Preferred Stock (Par Value $37.50, 1,200,000) 45 8% Preferred Stock (Par Value $75, 1,200,000) 90 Common stock (1.50 for 6,000,000) 9 Retained earnings 57 327 AFTER CAPITALIZATION 2.88 7.2 10.08 AFTER 9,000,000 45,000,000 90,000,000 15 debt. From the debt. From the holders because the

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.