Problem #2 (Reorganization Plan)

Problem #2 (Reorganization Plan)

The Veteran Publishing Companys 2012 balance sheet and income statement are as follows (in millions of dollars). Veteran 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% subordinated income debenture with a par value of $75. The $10.50 preferred issue will be retired with cash.

a.)Construct a pro forma balance sheet assuming that reorganization takes place. Show the new preferred stock at is par value.

b.)Construct the pro forma income statement. What is the income available to common shareholders in the proposed recapitalization?

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 Veterans common stock, would you vote in favor of the reorganization?

Balance Sheet

Current assets	$168	Current liabilities	$42
Net fixed assets	153	Advance payments	78
Goodwill	15	Reserves	6
		$6 pref. stock, $112.50 par (1,200,000 shares)	135
		$10.50 pref stock, no par, callable at $150 (60,000 shares)	9
		Common stock, $1.50 par value (6,000,000 shares)	9
		Retained earnings	57
Total assets	$336	Total claims	$336

Income Statement

Net sales	$540.0
Operating expense	516.0
Net operating income	$24.0
Other income	3.0
EBT	$27.0
Taxes (50%)	13.5
Net income	$13.5
Dividends on $6 preferred	7.2
Dividends on $10.50 preferred	0.6
Income available to common stockholders	$5.7

The pro forma balance sheet follows (in millions of dollars):

Current assets	$159a		Current liabilities	$42
Net fixed assets	$153		Advance payments	$78
Good will	$15		Reserves	$6
			Subordinated debentures	$90b
			$2.40 preferred stock, $37.50 par value, (1,200,000 shares)	$45c
			Common stock, $1.50 par value (6,000,000 shares)	$9
			Retained earnings	$57
Total assets	$327		Total claims	$327