MINDTAP FINANCE FOR GARMAN/FORGUE'S PER
13th Edition
ISBN: 9781337288347
Author: FORGUE
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Question
Chapter 6, Problem 1DTM
a
Summary Introduction
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
Expert Solution
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
Summary Introduction
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
Expert Solution
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.
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Students have asked these similar questions
Kim is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Kim is living at home and works in a shoe store, earning a gross income of $970 per month. Her employer deducts $221 for taxes from her monthly pay. Kim also pays $98 on several credit card debts each month. The loan she needs for chiropractic school will cost an additional $109 per month. Help Kim make her decision by calculating 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.)
Debt Payments-to-Income Ratio
Ratio with college loan
Ratio without college loan
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 $1,140 per month. Her employer deducts a total of $260 for taxes from her monthly pay. Madeline also pays $160 on several credit card debts each month. The loan she needs for chiropractic school will cost an additional $260 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.)
Debt Payments-to-Income Ratio
With college loan %
Without college loan %.
Pls show steps complete.
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 $960 per month. Her employer deducts a total of $170
for taxes from her monthly pay. Madeline also pays $115 on several credit card debts
each month. The loan she needs for chiropractic school will cost an additional $170 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.)
With college loan
Without college loan
Debt Payments-to-
Income
Ratio
Chapter 6 Solutions
MINDTAP FINANCE FOR GARMAN/FORGUE'S PER
Ch. 6.1 - Prob. 1CCCh. 6.1 - Prob. 2CCCh. 6.1 - Prob. 3CCCh. 6.1 - Prob. 4CCCh. 6.2 - Distinguish among the continuous debt method,...Ch. 6.2 - Prob. 2CCCh. 6.2 - Prob. 3CCCh. 6.2 - Prob. 4CCCh. 6.3 - Prob. 1CCCh. 6.3 - Prob. 2CC
Ch. 6.3 - Prob. 3CCCh. 6.3 - Prob. 4CCCh. 6.3 - Prob. 5CCCh. 6.4 - Prob. 1CCCh. 6.4 - Prob. 2CCCh. 6.4 - Prob. 3CCCh. 6.4 - Distinguish between Chapter 7 and Chapter 13...Ch. 6 - Prob. 1DTMCh. 6 - Buying a Vacation Home. Barrie and Inga Adlington,...Ch. 6 - Prob. 3DTMCh. 6 - The Johnsons Attempt to Resolve Their Credit and...Ch. 6 - Victor and Maria Advise Their Niece Victor and...Ch. 6 - Julia Price Thinks About a Loan to Buy an Inboard...Ch. 6 - Prob. 4FPCCh. 6 - Cousins Discuss Their Debt Situations Melinda...Ch. 6 - Prob. 6FPC
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