
To determine:
Net worth, income available for savings, current ratio, savings ratio, months living expense covered ratio, debt ratio, long term debt covering ratio, interpretation and advice of the ratios.
Introduction:
Net worth is that part of the assets that exceed liabilities. It is calculated by subtracting borrowing or debt from total assets.
Current ratio shows whether the business has enough funds to meet current liabilities or not. It is calculated by dividing monetary asset from current liabilities.
Saving ratio shows the how much they are saving with the amount of money that they have for their living expenditure. It is calculated by dividing income available for savings and investment from income available for living expenditure.
Monthly living expense covered ratio shows whether a person have enough liquidity to meet emergencies or not. It is calculated by dividing monetary assets by monthly living expenditure.
Debt ratio shows the ability of the household whether they can pay their debt or liability or not. It is calculated by dividing total debt or total liability from total assets.
Long-term debt coverage ratio shows the ability of the person to pay its long term debt. It is calculated by dividing total income available for living expenses and total long term debt payments.

Explanation of Solution
Personal
Balance Sheet of F | ||
Assets (What You Own) | ||
Particulars | Amount ($) | |
A | Stocks | 5,500 |
B | Temple Mutual Fund | 2,100 |
C | 401(K) Retirement Account | 4,500 |
D | Savings Account | 2,300 |
E | Checking Account | 825 |
F | Inherited Coin Collection | 3,250 |
G | Condominium | 65,000 |
H | Auto | 9,000 |
I | Furnishings | 5,500 |
J | Other Personal Property | 8,000 |
K | Total Assets | 105,975 |
Liabilities or Debt (What You Owe) | ||
L | Visa Bill | 355 |
M | MasterCard Bill | 245 |
N | Total Monthly Utilities | 275 |
O | Mortgage Outstanding | 50,000 |
P | Auto Loan Outstanding | 4,225 |
Q | Total Liabilities | 55,100 |
Net Worth | ||
K | Total Assets | 105,975 |
Q | Less: Total Debt | 55,100 |
R | Equals: Net Worth | 50,875 |
Net worth of F is $50,875.
Prepare income statement.
Income Statement for F | ||
Particulars | Amount ($) | |
Take-Home Pay | ||
A | Monthly Paycheck, Net | 2,400 |
Living Expenses | ||
B | Visa Bill | 355 |
C | MasterCard Bill | 245 |
D | Total Monthly Utilities | 275 |
E | Monthly Medical Expenses | 22 |
F | Mortgage Payment, Monthly | 530 |
E | Car Payment, Monthly | 265 |
F | Clothing Expenses, Monthly | 45 |
G | Monthly Auto Insurance (not due) | 150 |
H | Food, Monthly | 225 |
I | Other Expenses, Monthly | 150 |
J | Total Living Expenses | 2,262 |
Total Available for Savings and Investments | ||
A | Monthly Paycheck, Net | 2,400 |
J | Total Living Expenditure | 2,262 |
K | Income Available for Savings and Investment | 138 |
Total amount available for savings and investment is $138.
Current Ratio:
Given,
Monetary assets are $3,125.
Current liabilities are $875.
Formula to calculate saving ratio is,
Substitute $3,125 for monetary assets and $875 for current liabilities in the above formula.
This shows that F has enough assets to pay her current liabilities, approximately 3.6 times its value.
Working notes:
Calculation for monetary assets,
Savings Ratio:
Given,
Income available for savings and investment is $138.
Income available for living expenditure is $2,400
Formula to calculate saving ratio is,
Substitute $138 for income available for savings and investment and $2,400 for income available for living expenditure in the above formula.
This means F is saving 0.0575 part or 5.75% of the amount he has available for living expenditure. F can increase her savings as this is low.
Monthly’s Living ExpenseCovered Ratio:
Given,
Monetary assets are $3,125.
Monthly living expenditure is $2,262.
Formula to calculate monthly’s living expense ratio is,
Substitute $3,125 for monetary assets and $2,262 for monthly living expense in the above formula.
This shows that F has enough balance to pay for one month expenditure but a usual person should have a balance to cover five to six month of expenditure but he does not have. Hence, he should to try to create its monetary asset.
Debt Ratio:
Given,
Total debt is $55,100.
Total assets are $105,975.
Formula to calculate debt ratio is,
Substitute $55,100 for total debt and $105,975 for total assets in the above formula.
This shows that 52% of the asset if financed through borrowing. He should try to keep it down because it is too high.
Long-Term Debt Coverage Ratio:
Given,
Total income available for living expenses is $2,400.
Total long term debt payment is $795.
Formula to calculate long-term debt coverage ratio is,
Substitute $$2,400 for total income available for living expense and $795 for total long-term debt payments in the above formula.
Debt coverage ratio of 3.02 is good. It shows He has enough amounts to cover her long term obligations.
Advice to F is:
- She should increase her savings.
- She should try to reduce her expense.
- Try to keep liabilities as low as possible.
Hence, she should try to keep those ratios within its limit and also try to follow the advice.
Want to see more full solutions like this?
Chapter 2 Solutions
Personal Finance (8th Edition) (What's New in Finance)
- Single-payment loan repayment Personal Finance Problem A person borrows $280 that he must repay in a lump sum no more than 8 years from now. The interest rate is 7.7% annually compounded. The borrower can repay the loan at the end of any earlier year with no prepayment penalty. a. What amount will be due if the borrower repays the loan after 2 year? b. How much would the borrower have to repay after 4 years? c. What amount is due at the end of the eighth year? a. The amount due if the loan is repaid at the end of year 2 is $ (Round to the nearest cent.) b. The repayment at the end of year 4 is $ (Round to the nearest cent.) c. The amount due at the end of the eighth year is $ (Round to the nearest cent.)arrow_forwardGrowth rates Jamie El-Erian is a savvy investor. On January 1, 2010, she bought shares of stock in Amazon, Chipotle Mexican Grill, and Netflix. The table, , shows the price she paid for each stock, the price she received when she eventually sold her shares, and the date on which she sold each stock. Calculate the average annual growth in each company's share price over the time that Jamie held its stock. The average annual growth for Amazon is The average annual growth for Chipotle is The average annual growth for Netflix is %. (Round to two decimal places.) %. (Round to two decimal places.) %. (Round to two decimal places.)arrow_forwardYour portfolio has three asset classes. U.S. government T-bills account for 48% of the portfolio, large-company stocks constitute another 33%, and small-company stocks make up the remaining 19%. If the expected returns are 4.71% for the T-bills, 14.13% for the large-company stocks, and 19.85% for the small-company stocks, what is the expected return of the portfolio? The expected return of the portfolio is %. (Round to two decimal places.)arrow_forward
- betas: A, 0.4 B, 1.5 C, -0.4 D, 1.7arrow_forwardIntegrative―Risk, return, and CAPM Wolff Enterprises must consider one investment project using the capital asset pricing model (CAPM). Relevant information is presented in the following table. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Item Risk-free asset Market portfolio Project 4% Rate of return Beta, b 0.00 12% 1.00 1.28 a. Calculate the required rate of return for the project, given its level of nondiversifiable risk. b. Calculate the risk premium for the project, given its level of nondiverisifiable risk. a. The required rate of return for the project is %. (Round to two decimal places.) b. The risk premium for the project is %. (Round to two decimal places.)arrow_forwardSecurity market line (SML) Assume that the risk-free rate, RF, is currently 8% and that the market return, rm, is currently 15%. a. Calculate the market risk premium. b. Given the previous data, calculate the required return on asset A having a beta of 0.8 and asset B having a beta of 1.9. a. The market risk premium is ☐ %. (Round to one decimal place.) b. If the beta of asset A is 0.8, the required return for asset A is %. (Round to one decimal place.) If the beta of asset B is 1.9, the required return for asset B is %. (Round to one decimal place.)arrow_forward
- Risk and probability Micro-Pub, Inc., is considering the purchase of one of two digital cameras, R and S, each of which requires an initial investment of $4,000. Management has constructed the following table of estimates of rates of return and probabilities for pessimistic, most likely, and optimistic results: a. Determine the range for the rate of return for each of the two cameras. b. Determine the value of the expected return for each camera. c. Which camera purchase is riskier? Why? a. The range for the rate of return for camera R is %. (Round to the nearest whole number.) The range for the rate of return for camera S is ☐ %. (Round to the nearest whole number.) b. The value of the expected return for camera R is %. (Round to two decimal places.) The value of the expected return for camera S is %. (Round to two decimal places.) c. Which camera purchase is riskier? Why? (Select from the drop-down menus.) The purchase of is riskier because it has a range for the rate of return.arrow_forward4 analysts covered the stock of Flooring Chemical. One forecasts a 5% return for the coming year. The second expects the return to be -4%. The third predicts a return of 9%. The fourth expects a 1% return in the coming year. You are relatively confident that the return will be positive but not large, so you arbitrarily assign probabilities of being correct of 33%, 7%, 18%, and 42%, respectively to the analysts' forecasts. Given these probabilities, what is Flooring Chemical's expected return for the coming year?arrow_forwardWhy you would be a quality recipient of the Linda K Crandall Nutrition Scholarship.arrow_forward
- If Image is blurr then tell me . please comment below i will write values. if you answer with incorrect values i will give unhelpful confirm.arrow_forwardNormal probability distribution Assuming that the rates of return associated with a given asset investment are normally distributed; that the expected return, r, is 17.2%; and that the coefficient of variation, CV, is 0.86, answer the following questions: a. Find the standard deviation of returns, or. b. Calculate the range of expected return outcomes associated with the following probabilities of occurrence: (1) 68%, (2) 95%, (3) 99%. a. The standard deviation of returns, or, is %. (Round to three decimal places.) b. (1) The lowest possible expected return associated with the 68% probability of occurrence is %. (Round to two decimal places.) The highest possible expected return associated with the 68% probability of occurrence is decimal places.) (2) The lowest possible expected return associated with the 95% probability of occurrence is decimal places.) %. (Round to two %. (Round to two The highest possible expected return associated with the 95% probability of occurrence is decimal…arrow_forwardGeneral Finance Please don't answer i posted blurred image mistakely. please comment below i will write values. if you answer with incorrect values i will give unhelpful confirm.arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education





