Campbell Company\'s balance sheet and income statement are shown below (in milli

Question

Campbell 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 $4 preferred will be exchanged for one share of $1.50 preferred with a par value of $50 plus one 10 percent subordinated income with cashdebenture with a par value of $50. The $6 preferred issue will be retired Balance Sheet Current Current Current Assets 250.0 Current liabilities 275.0 Net fixed assets 195.0 Advance payments 15.00 $4 preferred stock, $100 par value (1,000,000) shares 100.0 $6 preferred stock, no par, callable at 10 (800,000 shares) 8.0 Common stock, $0.50 par value (20,000,000) shares 10.0 Retained earnings 37.0 Total assets 445.0 Total claims 445.0 Income Statement Current Net sales 600.0 Operating expense 550.0 Net operating income 50.0 Other income 10.0 EBT 60.0 Taxes 9.0 Net income 51.0 Dividends on $4 PS 4.0 Dividends on $6 PS 4.8 Income to Common SHs 42.2 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? C)What are the required pre-tax earnings before and after the reorganization? D) Calculate the debt ratio before and after the reorganization? E) Would the common stockholders be in favor of the reorganization? Why or why not?

Explanation / Answer

The pro forma balance sheet (in millions of dollars) follows: Current assets $ 260000 Current liabilities $ 163000 Net fixed assets $ 51200 Advance payments $ 69528 Goodwill $ 10000 Reserves $ 100,000 Subordinated debentures $ 625114 $2.9 preferred stock, $39 par value(1,200,000 shares) $ 250090 Common stock, $1.50 par value (6,000,000 shares) $1.50*600000 Retained earnings $ 630000 Total assets $ 86500000 Total claims $8600000 ------------------------------ Net sales $ 16000 Operating expense $ 320000 Net operating income $ 14000 Other income $1200 EBI 80000 Interest expense $ 56000 EBT $ 55000 Taxes (50%) $ 1650000 Net income $ 410000 Dividends on $2.90 preferred $ 33600 Income available to common stockholders $ 47511 ------------------------------------ The required pre-tax earnings before recapitalization $ 628million The required pre-tax earnings after recapitalization $ 936 million

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