The Verbrugge’s Publishing Company’s 2004 balance sheet and income statement are as follows (in millions of dollars). Verbrugge’s 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 preferred with a par value of $37.50 plus one 8 percent subordinated income debenture with a par value of $75. The $10.50 preferred issue will be retired with cash.
a. Construct the pro forma balance sheet assuming that reorganization takes place. Show the new preferred at its par value.
b. Construct the pro forma income statement. How much does the proposed recapitalization increase income available to common shareholders?
c. Required earnings is defined as the amount that is just enough to meet fixed charges (debenture interest and/or preferred dividends). What are the required pre-tax earnings before and after the 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?