Question
Question is broken down A-D
04-2) The Verbragcee Puhlishing Company's 2016 balance seet and incoene statement are as eonganieation allows in millions of dollan) Balance Sheet Ralance Shee Current assets Net fixed assets s 42 Current liabilities Advance paymens 153 15 s6 prefetred stock, $112.50 par value 1,200,000shares) s10 50 preferred stock, so par, callable at $150 160,00 shares) 135 Common stock. $1.50 par vale 6,000,000 shares) Retained earnings 536 Total claims Total assets Net sales 5160 s 240 ) s 27.0 13.5 s 13.5 7.2 Operating expense Net operating income Other income EBT Taxes (50%) Net incomae Dividends on $6 preferred Diidends on $10.50 preferred Income available to common stockholders 5 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 $2.40 preferresd with a par value of $37.50 plus one 8% subordinated income debenture witha par value of $75. The 510.50 preferred issue will be retired with cash. a Construct the projected balance sheet while assuming that reorganization takes place. b. Construct the projected income statement. What is the income available to common c Required earnings is defined as the amount that is just enough to meet fixed charges d. How is the debt ratio affected by the reorganization? If you were a holder Show the new preferred stock at its par value. shareholders in the proposed recapitalization? (debenture interest andior preferred dividends). What are the required pre tax earnings before and after the recapitalization? of Verbrugge's common stock, would you vote in favor of the reorganization? Why or why not?
Explanation / Answer
Amount in $ in Millions
Verbrugge Publishing Company
b.
Notes
d.Debt Equity Ratio
Before Reconstruction
Debt-Equity Ratio=Total Debt/Shareholders Equity*100
Total Debt=Current Liabilities+Advance Payments=42+78=120
Shareholders Equity=Equity+Preference+Accumulated Profits
=9+135+9+6+57=216
Debt to Equity Ratio=120/216
=0.55 times
AFter Reconstruction
Debt=42+78+90=210
Shareholders Equity=9+6+45+57=117
=1.794 times
The position after reconstruction has higher debt equity ratio.As an investor I donot prefer Reconstruction since the repayment capability of Debts will be decreased when checked as per Debt to Equity ratio
Verbrugge Publishing Company
a.Balance Sheet Assets Amount Liabilities Amount Current Assets 159 Current liabilities 42 Net Fixed Assets 153 Advance Payments 78 Goodwill 15 Reserves 6 8% Subordinated Income Debenture of $75 Par value(1200000 in number) 90 $2.4 Preferred stock of $37.50 par value (1200000 in number) 45 Common Stock,$1.50 par value (6000000 shares) 9 Retained Earnings 57 Total Assets 327 Total Liabilities 327
