HACE 3200 1nd Edition Lecture 5 Outline of Last Lecture I Using Ratios A Financial Thermometer II Current Ratio III Month s Living Expenses Covered Ratio IV Debt Ratio V Long term Debt Coverage Ratio VI Savings Ratio VII Financial Planners Outline of Current Lecture I Practice Problems for Ratios Current Lecture Practice Problems for Ratios Chapter 2 Practice problems 1 Alice has a home and a vacation home which have market values of 170 000 and 70 000 respectively She also has monetary assets of 3500 spread among cash checking and savings accounts Her car is value at 12 000 She owes a remaining 40 000 on her first home and 20 000 on her vacation home She has a final car payment of 1000 this month Calculate Alice s NETWORTH Networth assets liabilities Assets o 170 000 o 70 000 o 3 5000 These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute o 12 000 255 500 Liabilities o 40 000 o 20 000 o 1 000 61 000 Assets Liabilities 255 500 61 000 194 5000 NetWorth 2 Alice has a home and a vacation home which have market values of 170 000 and 70 000 respectively She also has monetary assets of 3500 spread among cash checking and savings accounts Her car is value at 12 000 She owes a remaining 40 000 on her first home and 20 000 on her vacation home She has a final car payment of 1000 this month Calculate Alice s liabilities Liabilities 40 000 20 000 1 000 o 61 000 Liabilities 3 Justin and Brittany sat down and did their balance sheet They find that they have 1 000 in savings 2 cars worth 10 000 each 3 000 in checking 15 000 in their trust fund 2 000 in cash and 8 000 in stocks They owe 500 for Brittany s nose job the bill is due in October they owe 500 for Justin s dental work the bill is due next month and they owe 500 to their maid she wants paid now Calculate Justin and Brittany s current ratio Current Ratio Monetary Assets Current Liabilities Assets o 1 000 o 3 000 o 2 000 6 000 Liabilities o 500 o 500 o 500 1 500 Monetary assets Current Liabilities o 6 000 1 500 4 Which means that their monetary assets are 400 greater than their liabilities 4 Abbie and John have an annual income of 120 000 They live in a 3 bedroom house that has 4000 square feet Their 2 children are ages 3 and 8 Together they own 4 vehicles They have monetary assets of 60 000 and investment assets of 60 000 Liabilities include 50 000 for their house and 4 150 for personal loans Calculate Abbie and John s debt ratio BE CAREFUL WITH YOUR MATH Debt Ratio Total debt total assets Debt o 50 000 o 4 150 54 150 Assets o 60 000 o 60 000 120 000 Total debt total assets 54 150 120 000 o 4513 x 100 45 125 Which means that 45 of their assets are tied to debt 5 Harry Potter has 15 000 in monetary assets and 3 000 in current liabilities He has income available for savings of 2 000 and their income available for living expenses is 10 000 Harry s current ratio is Current Ratio Monetary assets current liabilities Assets o 15 000 Liabilities o 3 000 Current ratio 15 000 3 000 o 5 6 MC 1 Which means that 500 of their assets are greater than their current liabilities 4 Harry Potter has 15 000 in monetary assets and 3 000 in current liabilities He has income available for savings of 2 000 and their income available for living expenses is 10 000 Harry s savings ratio is Savings Ratio Income Available for Savings and Investing Income available for living expenditures Saving o 2 000 Living o 10 000 Savings Ratio 2 000 10 000 2 o 2 x 100 20 of income is used for savings 7 The savings ratio helps you determines how much you are saving It tells you what proportion of your after tax income is being saved If Joe has 76 000 available for living expenses after taxes have been removed and 8 600 available for savings and investing What is Joe s savings ratio Savings Ratio Income used for saving income used for living Saving o 8 6000 Living o 76 000 Savings ratio 8 600 76 000 1132 x 100 o 11 32 of his income is used for savings 8 Thom has monetary assets of 2 000 in savings 1 000 in checking and 590 in cash His annual living expenditures include 25 000 for his housing expenses 25 000 for food and entertaining and 2 234 for miscellaneous annual expenses Calculate Thom s month s living expense covered ratio Month s Living Expenses Covered Ratio Monetary Assets Annual Living expenses 12 Monetary Assets o 2 000 o 1 000 o 590 3 590 Annual Living Expenses o 25 000 o 25 000 o 2 234 52 234 12 must divide by 12 to break number into months 4 352 83 Months Living Expenses Covered Ratio 3 590 4 352 83 o 8248 This number represents months and since it is a decimal point it means that Thom can not cover even a month with his monetary assets Do NOT change number to percentage for answer 9 Calculate the long term debt coverage for the following Income available for living expenses 70 000 Income available for savings 30 000 mortgage that will be paid off in 2020 42 000 annual pmts School loans that will be paid off in 2015 4 000 annually Installment loan that will be paid off in November 1 500 Vehicle loan that comes due in 2016 5 000 annual pmt Long Term Debt Coverage Ratio Total income available for living Expenses total long term debt payments Living Expenses o 70 000 Debt o 42 000 o 4 000 o 5 000 51 000 Long Term Debt Coverage Ratio 70 000 51 000 o 1 3725 Which means that they have enough to pay off debt 1 3 times 10 Calculate John s tangible assets house worth 175 000 Savings Account 250 000 401K retirement Account 1 540 000 2 automobiles worth 20 000 each Gold Watch 2 000 Certificate of Deposit 4 000 Andy Warhol Painting 10 000 Lear Jet 300 000 Tangible Assets What you can TOUCH 175 000 20 000 20 000 2 000 10 000 300 000 o 127 000