The Verbrugge Publishing Company's 2019 balance sheet and income statement are as follows (in millions of dollars): Balance Sheet Current assets $300 Current liabilities $ 40 Net fixed assets 200 Advance payments by customers 80 Noncallable preferred stock, $6 coupon, 110 $110 par value (1,000,000 shares) Callable preferred stock, $10 coupon, no par, 200 $100 call price (200,000 shares) Common stock, $2 par value (5,000,000 shares) 10 _____ Retained earnings 60 Total assets $500 Total liabilities & equity $500 Income Statement Net sales $540 Operating expense 516 Net operating income $ 24 Other income 4 EBT $ 28 Taxes (25%) 7 Net income $ 21 Dividends on $6 preferred 6 Dividends on $10 preferred 2 Income available to common stockholders $ 13 Verbrugge and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the noncallable preferred will be exchanged for 1 share of $2.40 preferred with a par value of $35 plus one 8% subordinated income debenture with a par value of $75. The callable preferred issue will be retired with cash generated by reducing current assets.
The Verbrugge Publishing Company's 2019 balance sheet and income statement are as follows (in millions of dollars):
Balance Sheet
Current assets $300 Current liabilities $ 40
Net fixed assets 200 Advance payments by customers 80
Noncallable
$110 par value (1,000,000 shares)
Callable preferred stock, $10 coupon, no par, 200
$100 call price (200,000 shares)
Common stock, $2 par value (5,000,000 shares) 10
_____
Total assets $500 Total liabilities & equity $500
Income Statement
Net sales $540
Operating expense 516
Net operating income $ 24
Other income 4
EBT $ 28
Taxes (25%) 7
Net income $ 21
Dividends on $6 preferred 6
Dividends on $10 preferred 2
Income available to common stockholders $ 13
Verbrugge and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the noncallable preferred will be exchanged for 1 share of $2.40 preferred with a par value of $35 plus one 8% subordinated income debenture with a par value of $75. The callable preferred issue will be retired with cash generated by reducing current assets.
e.How is the debt ratio (i.e., liabilities/total assets) affected by the reorganization? Suppose you treated preferred stock as debt and calculated the resulting debt ratios. How are these ratios affected? If you were a holder of Verbrugge's common stock, would you vote in favor of the reorganization? Why or why not?
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