Reference no: EM13876103
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% 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%.
Balance Sheet prior to Reorganization (in millions)
Current Assets 200
Net fixed assets 225
Total assets 425
Current liabilities 175
Advance payments 10
$5 preferred stock, $100 par value (1,000,000) shares 100
$8 preferred stock, no par, callable at 100 (80,000 shares) 8
Common stock, $1.00 par value (5,000,000) shares 25
Retained earnings 107
Total claims 425
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?
Income Statement (in millions)
Prior to Reorganization After Reorganization
Net sales 700.0
Operating expense 630.0
Net operating income 70.0
Other income 7.0
EBT 77.0
Taxes 23.1
Net income 53.9
Dividends on $5 PS 5.0
Dividends on $8 PS 0.6
Income to Common SHs 48.3
c. Calculate 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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