HACE 3200 1nd Edition Lecture 5Outline of Last Lecture I. Using Ratios: A Financial ThermometerII. Current RatioIII. Month’s Living Expenses Covered RatioIV. Debt RatioV. Long-term Debt Coverage RatioVI. Savings RatioVII. Financial PlannersOutline of Current Lecture I. Practice Problems for RatiosCurrent Lecture- Practice Problems for RatiosChapter 2 Practice problems1. 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- Assetso 170,000o 70,000o 3,5000These 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 40,000o 20,000o 1,000 =61,000- Assets- Liabilities= $255,500- $61,000= $194,5000 NetWorth2. 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- 1,000o =$61,000 Liabilities3. 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 billis 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 - Assetso 1,000o 3,000o 2,000 =$6,000- Liabilitieso 500o 500o 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- Debto 50,000o 4,150 =$54,150- Assetso 60,000o 60,000 =$120,000- Total debt/total assets= 54,150/120,000o =.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- Assetso 15,000- Liabilitieso 3,000- Current ratio= 15,000/3,000o =5 Which means that 500% of their assets are greater than their current liabilities.6.MC14Harry Potter has $15,000 in monetary assets and $3,000 in current liabilities. He has income available for savings of $2,000 andtheir 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- Savingo 2,000- Livingo 10,000- Savings Ratio= 2,000/10,000= .2o .2 x 100= 20% of income is used for savings7. 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- Savingo 8,6000- Livingo 76,000- Savings ratio= 8,600/76,000= .1132 x 100o =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. Hisannual 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 Assetso 2,000o 1,000o 590 $3,590- Annual Living Expenseso 25,000o 25,000o 2,234 52,234/12 ( must divide by 12 to break number into months) = $4,352.83- Months Living Expenses Covered Ratio= 3,590/4,352.83o =.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 paidoff 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 debtpayments- Living Expenseso 70,000- Debto 42,000o 4,000o 5,000 $51,000- Long- Term Debt Coverage Ratio= 70,000/51,000o =1.3725 Which means that they have enough to pay off debt 1.3 times10. 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- 300,000o