Question

1)     Use the following balance sheet and cash flow information to determine the net worth and net surplus for an individual in a recent month: 

Liquid Assets $15,000

Home Value $220,000

Investment assets: $120,000

Personal Property $30,000

Total assets:  $385,000

 

Short Term Debt:  $7000 ($250 a month)

Monthly Mortgage Payment $1400 on a $180,000 mortgage

Total Debt:  $187,000

 

Monthly Gross Income:  $11,000

Monthly Disposable Income $ 4000

Monthly Expenses:  $7000

 

2)    Now that the individual in question 1 has a better understanding of their situation, let’s analyze further.  Given the balance sheet and cash-flow statement information in question 1, calculate the following ratios see page 87:

Liquidity Ratio

Asset-to-Debt Ratio

Debt-to-Income Ratio

Debt payments-to-disposable income ratio

Investment assets-to-total assets ratio

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Answer 1

1. Net worth= Total asset-Total debt

$$ \begin{array}{l} =\$ 385,000-\$ 187,000 \\ =\$ 198,000 \end{array} $$

Net Surplus= Monthly gross income-monthly expenses

$$ \begin{array}{l} =\$ 11,000-\$ 7,000 \\ =\$ 4,000 \end{array} $$

2.

Liquidity ratio= Liquid assets/current liabilities

$$ \begin{array}{l} =\$ 15,000 / \$ 7,000 \\ =2.14 \end{array} $$

Debt to asset ratio=Total debt/total assets

$$ \begin{array}{l} =\$ 187,000 / \$ 385,000 \\ =0.4857 \end{array} $$

Asset to debt ratio= total assets/total debt

\(=\$ 385,000 / \$ 187,000\)

\(=2.058\)

Debt to income ratio= Monthly debt payment/monthly gross income

\(=(1,400+250) / 11,000\)

\(=0.15\)

Debt payments to disposable income ratio= Monthly debt payment/monthly disposable

income \(=\$ 1,650 / \$ 4,000=0.4125 .\)

Investment assets to total assets ratio= Investment asset/total asset

\(=\$ 120,000 / \$ 385,000\)

\(=0.31168\)