Question

Kemper Company's balance sheet and income statement are shown below (in millions of dollars). The company 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 $1.00 preferred with a par value of $25 plus one 9% subordinated income debenture with a par value of $75. The $9 preferred issue will be retired with cash. The company's tax rate is 30 percent.

Balance Sheet prior to Reorganization (in millions
Current Assets 400 Current liabilities 350
Net fixed assets 450 Advance payments 20
$5 preferred stock, $100 par value (1,000,000) shares 100
$9 preferred stock, no par, callable at 100 (160,000 shares) 30
Common stock, $0.10 par value (10,000,000) shares 50
Retained earnings 300
Total assets 850 Total claims 850

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?

Answer 1

Kemper Company

a. Pro forma Balance Sheet after Reorganization (in millions)

Current Assets 400

Net fixed assets 450

Total assets 850

Current liabilities 350

Advance payments 20

9% subordinated Debenture,

$75 par value (1,000,000) 75

$1 preferred stock, $25 par value

(1,000,000) shares 25

Common stock, $0.10 par value

(10,000,000) shares 50

Retained earnings 300

b. Pro forma Income Statement after Reorganization (in millions)

Retained earnings 300

Income tax 128.6 ($300/(1 - 0.3) - $300)

add $5 preferred dividend 5

$9 preferred dividend 1.44

Less: 9% debenture interest (6.75)

Income before taxes $428.29

Income tax 128.49

Income after taxes $299.80

Preferred dividend 1.00

Retained earnings $298.80

The recapitalization reduces the net income available to common stockholders by $0.2 million.

Step-by-step explanation:

a) Data and Calculations:

Kemper Company

Balance Sheet prior to Reorganization (in millions

Current Assets 400

Net fixed assets 450

Total assets 850

Current liabilities 350

Advance payments 20

$5 preferred stock, $100 par value

(1,000,000) shares 100

$9 preferred stock, no par,

callable at 100 (160,000 shares) 30

Common stock, $0.10 par value

(10,000,000) shares 50

Retained earnings 300

Total assets 850 Total claims 850

Transaction Analysis:

$5 preferred stock, $100 par value (1,000,000) shares $100 $1 Preferred stock, $25 par value (1,000,000) shares $25 9% subordinated Debenture, $75 par value (1,000,000) $75

$9 preferred stock, no par, callable at 100 (160,000 shares) 30 Cash $30

Total assets 850 Total claims 850