Corizon Company's balance sheet and income statement are shown below (in millions of dollars). Corizon and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the $5 preferred will be exchanged for one share of $2.00 preferred with a par value of $50 plus one 10 percent subordinated income debenture with a par value of $50. The $8 preferred issue will be retired with cash. The company's tax rate is 30 percent
Current Assets 175.0 Current liabilities 150.0
Net fixed assets 183.0 Advance payments 10.0
$5 preferred stock, $100 par value (1,000,000) shares 100.0
$8 preferred stock, no par, callable at 100 (80,000 shares) 8.0
Common stock, $1.00 par value (5,000,000) shares 5.0
Retained earnings 85.0
Total assets 358.0 Total claims 358.0
Net sales 600.0
Operating expense 550.0
Net operating income 50.0
Other income 10.0
Net income 42.0
Dividends on $5 PS 5.0
Dividends on $8 PS 0.6
Income to Common SHs 36.4
a. Construct the pro forma balance sheet after reorganization takes place. Show the new preferred at its par value
b. Construct the pro forma income statement after reorganization takes place. How does the recapitalization affect net income available to common stockholders?
c. What are the required pre-tax earnings before and after the recapitalization?
d. Calculate the debt ratio before and after the reorganization?
e. Would the common stockholders be in favor of the reorganization? Why or why not?
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