4. Calculating the Debt Payments-to-Income Ratio. Kim is trying to decide whether she can afford a loan she needs in orderto go to chiropractic school. Right now Kim is living at home and works in a shoe store, earning a gross income of$820 per month. Her employer deducts $145 for taxes from her monthly pay. Kim also pays $95 on several credit card debtseach month. The loan she needs for chiropractic school will cost an additional $120 per month. Help Kim make her decisionby calculating her debt payments-to-income ratio with and without the college loan. (Remember the 20 percent rule.)LO6-3

Question
Asked Feb 17, 2020
34 views

Chapter 6

Practice Problem #4

4. Calculating the Debt Payments-to-Income Ratio. Kim is trying to decide whether she can afford a loan she needs in order
to go to chiropractic school. Right now Kim is living at home and works in a shoe store, earning a gross income of
$820 per month. Her employer deducts $145 for taxes from her monthly pay. Kim also pays $95 on several credit card debts
each month. The loan she needs for chiropractic school will cost an additional $120 per month. Help Kim make her decision
by calculating her debt payments-to-income ratio with and without the college loan. (Remember the 20 percent rule.)
LO6-3
help_outline

Image Transcriptionclose

4. Calculating the Debt Payments-to-Income Ratio. Kim is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Kim is living at home and works in a shoe store, earning a gross income of $820 per month. Her employer deducts $145 for taxes from her monthly pay. Kim also pays $95 on several credit card debts each month. The loan she needs for chiropractic school will cost an additional $120 per month. Help Kim make her decision by calculating her debt payments-to-income ratio with and without the college loan. (Remember the 20 percent rule.) LO6-3

fullscreen
check_circle

Expert Answer

Step 1

Debt payment to income ratio is an indicator of what proportion of net income is the debt obligation.

This ratio is calculated as = Debt payments obligation / Net income where Net income = Gross income - taxes

Step 2

Net income = 820 - 145 = 675

Hence, Debt payment to income ratio with the college loan = (95 + 120) / 675 = 0.3185 = 31.85%

...

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.

Related Finance Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: Maynard Inc. has no debt outstanding and a total market value of $ 250,000. Earnings before interest...

A: Excel Spreadsheet:

question_answer

Q: Amanda Weet who is six years old has been gifted $100,000 (after-tax) towards a college fund. Her pa...

A: The internal rate of return or IRR is used in capital budgeting to determine the profitability of in...

question_answer

Q: One-year Treasury securities yield 2.75%. The market anticipates that 1 year from now, 1-year Treasu...

A: 1-Year Treasury Security Yield (Yield1) = 2.75% or 0.0275 Anticipated 1-Year Treasury Security Yield...

question_answer

Q: Question 10

A: Futura value annuity formula is used to calculate the value of the retirement account which earns 9%...

question_answer

Q: Quantitative Problem: You are holding a portfolio with the following investments and betas: Stock...

A: Portfolio beta is calculated as the sum of the weights of each stock in the portfolio multiplied by ...

question_answer

Q: Problem 6-19Special Rules for High-Income Taxpayers (LO 6.8) Rachel is single and has wages of $150,...

A: Calculation of net investment income tax: Answer: Net investment income tax she must pay is $1,520  

question_answer

Q: Explain the formula for cum dividends

A: Distribution of profit to shareholders occurs mostly in the form of dividends. Though, high growth c...

question_answer

Q: A share of stock with a beta of 0.76 now sells for $51. Investors expect the stock to pay a year-end...

A: Click to see the answer

question_answer

Q: Your parents will retire in 23 years. They currently have $290,000 saved, and they think they will n...

A: We need to use the concept of time value of money to solve the question. According to the concept of...