Verbarugge and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share $6 preferred will be exchange for one share of $2.40 preferred with a par value of $37.50 plus one 8% subordinated income debenture with a par value of $75. The $10.50 preferred issue will be retired with cash.
a. Construct a projected balance sheet assuming that reorganization takes place. show the new preferred stock at its par value.
b. Construct a projected income statement. What is the income available to common shareholders after recapitalization?
c. Required earnings is defined as the amount that is enough to meet fixed charges (debenture interest and/or preferred dividends). What is the required pre-tax earning before and after recapitalization?
d. How is the debt ratio affected by the reorganization? If you were a holder of Verbrugge's common stock, would you vote in favor of the reorganization? Why or why not?