Question

 Problem 5-1 (LO5.2)

 A few years ago, Simon Powell purchased a home for $215,000. Today, the home is worth $380,000. His remaining mortgage balance is $165,000. Assuming that Simon can borrow up to 75 percent of the market value, what is the maximum amount he can currently borrow against his home?

 Amount available for borrowing _______ 

 Problem 5-2 (LO5.3)

 Louise Mclntyre's monthly gross income is $4,000. Her employer withholds $870 in federal, state, and local income taxes and $420 in Social Security taxes per month. Louise contributes $270 each month for her IRA. Her monthly credit payments for VISA and

 MasterCard are $150 and $190, respectively. Her monthly payment on an automobile loan is $290.

 a. What is Louise's debt payments-to-income ratio? (Enter your answer as a percent rounded to 2 decimal places.)

 Debt payments-to-income ration _______ %

 b. Is Louise living within her means?

 No

 Yes

 Problem 5-3 (LO5.3)

 Robert Sampson owns a townhouse valued at $179,000 and still has an unpaid mortgage of $144,000. In addition to his mortgage, he

 has the following liabilities:

 Visa

 $ 725

 MasterCard

 320

 Discover card

 525

 Education loan

 4, 000

 Personal bank loan

 700

 Auto loan

 5, 400

 Total

 $11, 670

 Robert's net worth (not including his home) is about $33,000. This equity is in mutual funds, an automobile, a coin collection, furniture,

 and other personal property.

 a. What is Robert's debt-to-equity ratio? (Round your answer to 2 decimal places.)

 Debt-to-equity ratio

 b. Has he reached the upper limit of debt obligations?

 Problem 5-4 (LO5.3)

 Madeline Rollins is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now, Madeline is living at home and works in a shoe store, earning a gross income of $1,220 per month. Her employer deducts a total of $300 for taxes from her monthly pay. Madeline also pays $180 on several credit card debts each month. The loan she needs for chiropractic

 school will cost an additional $270 per month.

 Calculate her debt payments-to-income ratio with and without the college loan. (Remember the 20 percent rule.) (Enter your answers as a percent rounded to 2 decimal places.)

 Can she currently afford the school loan?

  Yes

  No

 Problem 5-5 (LO5.4)

 Joshua borrowed $800 for one year and paid $40 in interest. The bank charged him a service charge of $7. What is the finance charge on this loan?

 Finance charge _______ 

Answer 1

1. Solution: The amount that Simon Powell is able to currently borrow against his home is =$ 1,20,000( Refer note given below)

NOTE:

Simon Powell’s home is valued at $380,000 and Simon owes $ 165,000

Therefore Simon can have $215,000 ( $ 380000-$ 165000)of equity.

At 75 percent cumulative loan-to-value, the total amount of outstanding borrowing would be limited to $285,000 ($380,000 x 0.75= $285,000).

Simon must retain 25 percent equity in the home, which is $ 95,000 ($380,000 x 0.25= $ 95,000).

Therefore the amount that Simon Powell is able to borrow is calculated as following:

$ 1,20,000 ( i.e $ 215,000 − $ 95,000 = $ 1,20,000){ subtracting the amount that has to be retained from the total equity, we get the amount that needs to be borrowed }