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The bond indenture for the 10-year, 9% debenture bonds issued January 2, 2013, required working capital of $100,000, a current ratio of 1.5, and a quick ratio of 1.0 at the end of each calendar year until the bonds mature. At December 31, 2014, the three measures were computed as follows:

1. Current assets:Cash$102,000Temporary investments48,000Accounts and notes receivable (net)120,000Inventories36,000Prepaid expenses24,000Intangible assets124,800Property, plant, and equipment55,200Total current assets (net)$510,000Current liabilities:Accounts and short-term notes payable$96,000Accrued liabilities204,000Total current liabilities300,000Working capital$210,0002. Current ratio1.7$510,000÷$300,0003. Quick ratio1.2$115,200÷$96,000\begin{array}{lrr} \text{1. Current assets:}\\ \quad\text{Cash}& \$102,000\\ \quad\text{Temporary investments}& 48,000\\ \quad\text{Accounts and notes receivable (net)}& 120,000\\ \quad\text{Inventories}& 36,000\\ \quad\text{Prepaid expenses}& 24,000\\ \quad\text{Intangible assets}& 124,800\\ \quad\text{Property, plant, and equipment}& 55,200\\ \quad\quad\text{Total current assets (net)}&& \$510,000\\ \text{Current liabilities:}\\ \quad\text{Accounts and short-term notes payable}& \$ 96,000\\ \quad\text{Accrued liabilities}& 204,000\\ \quad\quad\text{Total current liabilities}& &300,000\\ \quad\text{Working capital}&& \$210,000\\ \text{2. Current ratio}& 1.7& \$510,000 \div \$300,000\\ \text{3. Quick ratio}& 1.2 &\$115,200 \div \$ 96,000\\ \end{array}

b. Is the company satisfying the terms of the bond indenture?

The bond indenture for the 10-year, 9% debenture bonds issued January 2, 2013, required working capital of $100,000, a current ratio of 1.5, and a quick ratio of 1.0 at the end of each calendar year until the bonds mature. At December 31, 2014, the three measures were computed as follows:

1. Current assets:Cash$102,000Temporary investments48,000Accounts and notes receivable (net)120,000Inventories36,000Prepaid expenses24,000Intangible assets124,800Property, plant, and equipment55,200Total current assets (net)$510,000Current liabilities:Accounts and short-term notes payable$96,000Accrued liabilities204,000Total current liabilities300,000Working capital$210,0002. Current ratio1.7$510,000÷$300,0003. Quick ratio1.2$115,200÷$96,000\begin{array}{lrr} \text{1. Current assets:}\\ \quad\text{Cash}& \$102,000\\ \quad\text{Temporary investments}& 48,000\\ \quad\text{Accounts and notes receivable (net)}& 120,000\\ \quad\text{Inventories}& 36,000\\ \quad\text{Prepaid expenses}& 24,000\\ \quad\text{Intangible assets}& 124,800\\ \quad\text{Property, plant, and equipment}& 55,200\\ \quad\quad\text{Total current assets (net)}&& \$510,000\\ \text{Current liabilities:}\\ \quad\text{Accounts and short-term notes payable}& \$ 96,000\\ \quad\text{Accrued liabilities}& 204,000\\ \quad\quad\text{Total current liabilities}& &300,000\\ \quad\text{Working capital}&& \$210,000\\ \text{2. Current ratio}& 1.7& \$510,000 \div \$300,000\\ \text{3. Quick ratio}& 1.2 &\$115,200 \div \$ 96,000\\ \end{array}

a. List the errors in the determination of the three measures of current position analysis.

Question

Should the rate earned on common stockholder's equity normally be higher or lower than the rate earned on total stockholders’ equity? Explain.

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In this problem, we are asked to determine whether the rate earned on common stockholders’ equity would be higher or lower than the rate earned on total stockholders’ equity.

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