
a
To determine: The debt payments-to-disposable income ratio.
Introduction:
Establishment of debit limit:A debit limit is the overall maximum credit one should get based on his ability to meet the repayment obligations. The recommended safe debt limit is considered to be 11 to 14 percent debt payment limits as percentage of disposable personal income, the length of time that high debt payment is also important to consider.
They are three recommended methods for you to determine the debt limit.
- Continuous-debt method:under this method, it is evaluated if it is difficult to get out of debt completely every four years, if yes it shows you are heavily dependent on debt.
- Debt payments-to-disposable income method: it uses the debt payment to disposable income ratio excluding mortgage loan, it focuses on the amount of monthly debt repayment.
- Debt-to-income method: it is based on the ratio of debt to income a ratio of 36 percent or less is desirable.
a

Answer to Problem 1DTM
KJ’s debt payment to disposable income ratio is 21%. It is way above the desired ratio of 14%
Explanation of Solution
Debt payment to disposable income can be calculated by following formula
K has an outstanding student loan for which he pays $900 per month and auto loan repayment $300 hence total non-mortgage loan payment debt is $1,200 and his disposable income
Amount $ | |
Salary | 9,000 |
Less: Federal tax | (1,800) |
State tax | (500) |
Medicare | (700) |
Social security tax | (230) |
Disposable income | 5,770 |
b
To determine: Whether K’s plan to go for an automobile loan to buy a motorcycle is feasible.
Introduction:
Establishment of debit limit:A debit limit is the overall maximum credit one should get based on his ability to meet the repayment obligations. The recommended safe debt limit is considered to be 11 to 14 percent debt payment limits as percentage of disposable personal income, the length of time that high debt payment is also important to consider.
They are three recommended methods for you to determine the debt limit.
- Continuous-debt method: under this method, it is evaluated if it is difficult to get out of debt completely every four years, if yes it shows you are heavily dependent on debt.
- Debt payments-to-disposable income method: it uses the debt payment to disposable income ratio excluding mortgage loan, it focuses on the amount of monthly debt repayment.
- Debt-to-income method: it is based on the ratio of debt to income a ratio of 36 percent or less is desirable.
b

Answer to Problem 1DTM
KJ should not go for another loan, as his debt payment to disposable income is not good.
Explanation of Solution
Estimated funds available for debt repayment is expected to less than 14%. Because K’s ratio is 21%, he may face difficulty in repayment of additional debt as he has too low disposable income. It will also affect spending capacity and may affect liquidity position of an individual that is he may face difficulty in managing day to day expenses, thus.It is not advisable for him to go for one more debt, as he may face difficulty in repayment of one more loan.
Want to see more full solutions like this?
Chapter 6 Solutions
Personal Finance (MindTap Course List)
- If the Net Present Value (NPV) of a project is positive, it means:A. The project will break evenB. The project is not financially viableC. The project is expected to add value to the firmD. The payback period is very short need help!!arrow_forwardi need help!!If the Net Present Value (NPV) of a project is positive, it means:A. The project will break evenB. The project is not financially viableC. The project is expected to add value to the firmD. The payback period is very shortarrow_forwardDon't use ai. If the Net Present Value (NPV) of a project is positive, it means:A. The project will break evenB. The project is not financially viableC. The project is expected to add value to the firmD. The payback period is very shorthelp mearrow_forward
- 6. If the Net Present Value (NPV) of a project is positive, it means:A. The project will break evenB. The project is not financially viableC. The project is expected to add value to the firmD. The payback period is very shortarrow_forwardno ai A stock’s beta coefficient measures its:A. Total riskB. Diversifiable riskC. Market risk relative to the overall marketD. Interest rate sensitivityarrow_forwardWhich of the following ratios is used to measure a company’s profitability?A. Current RatioB. Quick RatioC. Return on Equity (ROE)D. Debt to Equity Ratioarrow_forward
- Diversification is a strategy used to:A. Increase total riskB. Eliminate systematic riskC. Increase expected returnsD. Reduce unsystematic riski need help!!arrow_forwardDiversification is a strategy used to:A. Increase total riskB. Eliminate systematic riskC. Increase expected returnsD. Reduce unsystematic riskarrow_forwardI need answer !! What is the effect of compounding interest?A. It decreases total interest earned over timeB. It keeps the interest constantC. It increases interest earned over time by earning interest on interestD. It applies only to loans, not investmentsarrow_forward
- What is the effect of compounding interest?A. It decreases total interest earned over timeB. It keeps the interest constantC. It increases interest earned over time by earning interest on interestD. It applies only to loans, not investmentsarrow_forwardWhat is the effect of compounding interest?A. It decreases total interest earned over timeB. It keeps the interest constantC. It increases interest earned over time by earning interest on interestD. It applies only to loans, not investments need answer !!arrow_forwardi need help in this question!What is the primary goal of corporate finance?A. Maximize salesB. Minimize costsC. Maximize shareholder wealthD. Maximize employee satisfactionarrow_forward