Corizon Company\'s balance sheet and income statement are shown below (in millio

Question

Corizon Company's balance sheet and income statement are shown below (in millions of dollars).   Corizon 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 $2.00 preferred with a par value of $50 plus one 10 percent subordinated income debenture with a par value of $50. The $8 preferred issue will be retired with cash. The company's tax rate is 30 percent.

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.    Calculate the required pre-tax earnings to cover debt and preferred stock obligations, before and after the recapitalization?

Balance Sheet prior to Reorganization Current Assets               200 Current liabilities                      175 Net fixed assets               225 Advance payments                        10     $5 preferred stock, $100 par value (1,000,000) shares                      100 $8 preferred stock, no par, callable at 100 (80,000 shares)                          8 Common stock, $1.00 par value (5,000,000) shares                        25 Retained earnings                      107 Total assets               425 Total claims                      425

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?

Income Statement Prior to Reorganization Net sales           700.0 Operating expense           630.0 Net operating income              70.0 Other income                7.0 EBT              77.0 Taxes              23.1 Net income              53.9     Dividends on $5 PS                5.0 Dividends on $8 PS                0.6 Income to Common SHs              48.3

c.    Calculate the required pre-tax earnings to cover debt and preferred stock obligations, before and after the recapitalization?

d. Calculate the debt ratio before and after the reorganization?   e. Would the common stockholders be in favor of the reorganization? Explain your answer, providing at least 2 reasons for it.

Explanation / Answer

1.

Balance Sheet after Reorganization (in millions)

Current Assets

$ 200.00

Current liabilities

$ 175.00

Net fixed assets

$ 225.00

Advance payments

$ 10.00

   

$2 preferred stock, $50 par value (1,000,000) shares

$ 50.00

10% subordinated income debenture $50 par value

$ 50.00

$8 preferred stock, retired as cash

$ 8.00

Common stock, $1.00 par value (5,000,000) shares

$ 25.00

Retained earnings

$ 107.00

Total assets

$ 425.00

Total claims

$ 425.00

2.

Income Statement after reorganisation

(in millions)

Net sales

$ 700.00

Operating expense

$ 630.00

Net operating income

$ 70.00

Other income

$ 7.00

EBT

$ 77.00

Taxes

$ 23.10

Net income

$ 53.90

Dividends on $2 PS

$ 2.00

Dividends on $8 PS

$ 0.60

10% subordinated income debenture $50 par value

$ 5.00

Income to Common SHs

$ 56.30

Net income Increase

$ 8.00

Balance Sheet after Reorganization (in millions)

Current Assets

$ 200.00

Current liabilities

$ 175.00

Net fixed assets

$ 225.00

Advance payments

$ 10.00

   

$2 preferred stock, $50 par value (1,000,000) shares

$ 50.00

10% subordinated income debenture $50 par value

$ 50.00

$8 preferred stock, retired as cash

$ 8.00

Common stock, $1.00 par value (5,000,000) shares

$ 25.00

Retained earnings

$ 107.00

Total assets

$ 425.00

Total claims

$ 425.00

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