Debt and Credit Card Debts
Topics: Debt, Credit card, Interest, Loan / Pages: 5 (1153 words) / Published: Nov 29th, 2013

PROBLEMS (p. 180)
1. A few years ago, Simon Powell purchased a home for $150,000. Today, the home is worth $250,000. His remaining mortgage balance is $100,000. Assuming that Simon can borrow up to 75 percent of the market value, what is the maximum amount he can borrow? (LO 5.2)
Present market value of Simon’s home = $250,000. Simon can borrow up to 75 percent of the market value, or $187,500. Simon still owes $100,000 mortgage on his home. Therefore, he can borrow an additional $87,500.
2. Louise McIntyre’s monthly gross income is $3,000. Her employer withholds $700 in federal, state, and local income taxes and $250 in Social Security taxes per month. Louise contributes $100 per month for her IRA. Her monthly credit payments for VISA and MasterCard are $65 and $60, respectively. Her monthly payment on an automobile loan is $375. What is Louise’s debt payments-to-income ratio? Is Louise living within her means? (LO 5.3)
Louise’s Gross Income
=
$3,000

Less: Income taxes
=
-700

Less: Social Security Tax
=
-250

Less: IRA contribution
=
-100

Net take-home pay
=
$1,950

Her monthly payments on VISA, MasterCard, and a car loan add up to $500 per month. Louise’s debt payments to income ratio is 500 to 1,950, or 25.6 percent. This ratio exceeds the recommended 20 percent figure. Therefore, Louise is overextended. Her maximum monthly loan and credit card payments should not be over $390.
3. Robert Sampson owns a $175,000 townhouse and still has an unpaid mortgage of $140,000. In addition to his mortgage, he has the following liabilities:
Visa
$705
MasterCard
280
Discover card
505
Education loan
2,000
Personal bank loan
300
Auto loan
5,000

Total
$8,790

Robert’s net worth (not including his home) is about $35,000,. This equity is in mutual funds, an automobile, a coin collection, furniture, and other personal property. What is Robert’s debt-to-equity ratio? Has he reached the upper limit of debt obligations?

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