PFIN 5th Edition by Randall Billingsley,Lawrence Gitman,Michael Joehnk

Exercise 9

Calculating debt safety ratio. Use Worksheet 7.1. Every six months, Cesar Reynoso takes an inventory of the consumer debts that he has outstanding. His latest tally shows that he still owes $4,000 on a home improvement loan (monthly payments of $125); he is making $85 monthly payments on a personal loan with a remaining balance of $750; he has a $2,000, secured, single-payment loan that's due late next year; he has a $70,000 home mortgage on which he's making $750 monthly payments; he still owes $8,600 on a new car loan (monthly payments of $375); and he has a $960 balance on his Visa (minimum payment of $40), a $70 balance on his Exxon credit card (balance due in 30 days), and a $1,200 balance on a personal line of credit ($60 monthly payments). Use Worksheet 7.1 to prepare an inventory of Cesar's consumer debt. Find his debt safety ratio, given that his take-home pay is $2,500 per month. Would you consider this ratio to be good or bad? Explain.