1) Suppose your Assets are $400 and your Liabilities are $600. How much is your Net...

1) Suppose your Assets are $400 and your Liabilities are $600. How much is your Net Worth?

2) Now suppose you add $500 in Assets. What would be a "real life" way you could do this. How much would your Net Worth now be?

3) What would your Debt-to-Equity ratio be, based on #2?

4) Now suppose you take home $24,000 in a year, and you have a $400 car payment and $400 in credit card payments. How much are your monthly credit payments? Use a ratio to calculate whether you are in good financial shape.

Solutions

Expert Solution

Value of assets = $400

Value of liabilities = $600

Networth = Value of assets - Value of liabilities = $400 - $600 = -$200

"Real life" way to increase assets to earn net income in the company that will increase the overall value of assets. Increase in net profit leads to increase in net assets.

New Value of assets = $400 + $500 = $900

Value of liabilities = $600

Networth = Value of assets - Value of liabilities = $900 - $600 = $300

Debt to Equity ratio = Debt / Equity

Value of debt = 600

Value of Equity = Value of networth = 300

Debt to Equity ratio = 600/300 = 2

Net income for the year = 24000

Car Payment in a year = 400

Credit card payment = 400

Total Payment in a year = 400 + 400 = 800

Total monthly payment = 800/12 = 66.67

Total monthly net income = 24000/12 = 2000

Excess income over expenses = 2000 - 66.67 = 1933.33

Expense ratio = 66.67/2000 *100 = 3.33%

Expense is only 3.33% of net income per month. So, we are in a good financial shape.

ekkarill92 answered 1 year ago

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