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In: Finance

Lambert is meeting with the bank on October 31, 2020 and isquite nervous. He is...

Lambert is meeting with the bank on October 31, 2020 and is quite nervous. He is looking to buy a condo and knows that the bank will be assessing their risk in deciding how large of a loan to approve. He has provided you with the following information to help prepare for the meeting with the bank.

Item

Value or amounts as of Oct. 1, 2020

Chequing account

$2,000

Tuition loan (remaining balance and must be paid by Dec. 31, 2020

$3,000

Savings account (amount recently deposited on July 1st after receiving his company bonus)

$5,000

Furniture

$4,550

Car

$21,700

Car loan (loan payable over 2 years)

$15,300

Monthly VISA payment (VISA always paid monthly in full when due)

$1,200

Disposable income

$86,800

Registered Retirement Savings Plan (RRSP) - stocks

$49,550

Monthly rent (paid on the 1st of each month)

$1,500

Food (weekly purchases)

$200

Utilities including internet (monthly)

$300

Other monthly expenses

$1,300

Tax-Free Savings Account (TFSA)

$12,000

What is his Net wroth?

what is his liquidity ratio?

what is his savings ratio?

Solutions

Expert Solution

1. Net worth = The Sum of [Chequing account + Savings account + Furniture + Car + Disposable income + Registered Retirement Savings Plan (RRSP) stocks + Tax-Free Savings Account (TFSA)] - the sum of [Tution loan + Car loan + Visa payment + rent + food + Utility + monthly expense]

or, Net worth = [2000 + 5000 + 4550 + 21700 + 86800 + 49550 + 12000] - [3000 + 15300 + 1200 + 1500 + 200 + 300 + 1300] = $ 158,800

2. Liquidity ratio is the ratio of all near cash or liquit assets available to the net worth.

And, Liquidity ratio (in accounting language) is the ratio of Quick cash (Current asset - Current liability), or cash equivalent to the Current assets.

or, Liquidity ratio = The sum of (Chequing account + Savings account + Disposable income + Tax-Free Savings Account) / Net worth

= (2000 + 5000 + 86800 + 12000) / 158,800

= 105800 / 158800 = 0.66

3. Saving ratio can be represented as the ratio of total savings (as, deposits, FD, Equities, policies schemes etc) and Gross income (as salary, bonus, EPF contribution, interest, dividend, rent/royalty and any other form of income)

or, Saving ratio = (Tax-Free Savings Account + Registered Retirement Savings Plan (RRSP) stocks) / (Disposable income)   

= (12000 + 49550) / 86800

= 0.709 ~ 0.71

jeff jeffy answered 2 years ago
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