Question 5. (20 points) Kemper Company\'s balance sheet and income statement are
ID: 2806725 • 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.
Income Statement (in millions)
Prior to Reorganization
After Reorganization
Net sales
900.0
Operating expense
725.0
Net operating income
175.0
Other income
7.0
EBT
182.0
Taxes
54.6
30%
Net income
127.4
Dividends on $5 PS
5.0
Dividends on $9 PS
1.4
Income to Common SHs
121.0
Increased income available to common SHs with reorganization:
c. Calculate the required pre-tax earnings to cover debt and preferred stock obligations, before and after the recapitalization?
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
A.
Notes
$5 PS is exchanged with
$ 9 PS has been retired in cash
Hence Cash balance is $400-30=$370
After Reorganisation the Income of the shareholders increased hence cash balance also increase for respective income
Hence Cash balance is $370+$0.675=$370.675
Retained Earnings also increases=$300+$0.675=$300.675
Interest on Debentures=$75 milkions*9%=6.75 millions
c. The pre-tax earnings to cover debt and preferred stock obligations are
Balance Sheet After Reorganisation Assets Amount Liabilities Amount Current Assets 370.675 Current Liabilities 350 Nte Fixed Assets 450 Advance Payments 20 9% Debentures 75 $1 Preferred Stock ,$100 par value(1000000shares) 25 Common Stock,$0.10 par value (10000000 shares) 50 Retained Earnings 300.675 Total Assets 820.675 Total Claims 820.675Related Questions
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