Southwestern Wear Inc. has the following balance sheet:Current assets $1,875,000 Accounts payable $ 375,000 Fixed assets 1,875,000 Notes payable 750,000 Subordinated debentures 750,000 Total debt $1,875,000 Common equity 1,875,000 Total assets $3,750,000 Total liabilities and equity $3,750,000 The trustees costs total $281,250, and the firm has no accrued taxes or wages. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of $2.5 million is received from sale of the assets? The Verbrugge Publishing Companys 2010 balance sheet and income statement are as follows (in millions of dollars): Balance SheetCurrent assets $168 Current liabilities $ 42 Net fixed assets 153 Advance payments 78 Goodwill 15 Reserves 6 $6 preferred stock, $112.50 par value (1,200,000 shares) 135 $10.50 preferred 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 StatementNet 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 $ 5.7Verbrugge 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 the projected balance sheet while assuming that reorganization takes place. Show the new preferred stock at its par value. b. Construct the projected 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 Verbrugges common stock, would you vote in favor of the reorganization?
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