Victor and Maria, both in their late 30s, have two chil- dren: John, age 13, and Joseph, age 15. Victor has had a long sales career with a retail appliance store. Maria works part-time as a medical records assistant. The Her- nandezes own two vehicles and their home, on which they have a mortgage. They will face many financial challenges over the next 20 years, as their children drive, go to college, and leave home and go out in the world on their own. Victor and Maria also recognize the need to further prepare for their retirement and the challenges of aging. Victor and Maria spent some time making up their first balance sheet, which is shown in Table 3-2. Victor and Maria are a bit confused about how various financial activities can affect their net worth. (a)  Assume that their home is now appraised at $200,000 and the value of their automobile has dropped to $8,500. Calculate and characterize the effects of these changes on their net worth and on their asset-to-debt ratio. (b)  If Victor and Maria take out a bank loan for $1,600 and pay off their credit card debts totaling $1,600, what effects would these changes have on their net worth? (c)  If Victor and Maria sell their New York 2038 bond and put the cash into the savings account, what effects would this have on their net worth and liquidity ratio?

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Victor and Maria hernandez

Victor and Maria, both in their late 30s, have two chil- dren: John, age 13, and Joseph, age 15. Victor has had a long sales career with a retail appliance store. Maria works part-time as a medical records assistant. The Her- nandezes own two vehicles and their home, on which they have a mortgage. They will face many financial challenges over the next 20 years, as their children drive, go to college, and leave home and go out in the world on their own. Victor and Maria also recognize the need to further prepare for their retirement and the challenges of aging.

Victor and Maria spent some time making up their first balance sheet, which is shown in Table 3-2. Victor and Maria are a bit confused about how various financial activities can affect their net worth.

  1. (a)  Assume that their home is now appraised at $200,000 and the value of their automobile has dropped to $8,500. Calculate and characterize the effects of these changes on their net worth and on their asset-to-debt ratio.

  2. (b)  If Victor and Maria take out a bank loan for $1,600 and pay off their credit card debts totaling $1,600, what effects would these changes have on their net worth?

  3. (c)  If Victor and Maria sell their New York 2038 bond and put the cash into the savings account, what effects would this have on their net worth and liquidity ratio?

Table 3-2
Balance Sheet for a Couple with Two Children-Victor and Maria Hernandez,
January 1, 2018
ASSETS
Monetary Assets
Cash on hand
1,200
0.3%
Savings account
4,200
1.1%
Victor's checking account
2,700
0.7%
Maria's checking account
3,300
0.8%
Tax refund due
700
0.2%
Rent receivable
650
0.2%
Total Monetary Assets
$ 12,750
3.2%
Tangible Assets
Home
192,000
48.8%
Personal property
9,000
2.3%
Automobiles
9,500
2.4%
Total Tangible Assets
$210,500
53.5%
Investment Assets
Fidelity mutual funds
4,500
1.1%
Scudder mutual fund
5,000
1.3%
Ford Motor Company stock
2,800
0.7%
New York 2038 bonds
4,000
1.0%
Life insurance cash value
5,400
1.4%
IRA accounts
34,300
8.7%
Real estate investment
114,000
29.0%
Total Investment Assets
$170,000
43.2%
Total Assets
$393,250
100.0%
LIABILITIES
Short-Term Liabilities
Dentist bill due
220
0.1%
Credit card debt
1,600
0.4%
Total Short-Term Liabilities
$ 1,820
0.5%
Long-Term Liabilities
Vehicle loan
7,700
2.0%
Home mortgage loan
92,000
23.4%
Total Long-Term Liabilities
$ 99,700
25.4%
Total Liabilities
$101,520
25.8%
Net Worth
$291,730
74.2%
Total Liabilities and Net Worth
$393,250
100.0%
Transcribed Image Text:Table 3-2 Balance Sheet for a Couple with Two Children-Victor and Maria Hernandez, January 1, 2018 ASSETS Monetary Assets Cash on hand 1,200 0.3% Savings account 4,200 1.1% Victor's checking account 2,700 0.7% Maria's checking account 3,300 0.8% Tax refund due 700 0.2% Rent receivable 650 0.2% Total Monetary Assets $ 12,750 3.2% Tangible Assets Home 192,000 48.8% Personal property 9,000 2.3% Automobiles 9,500 2.4% Total Tangible Assets $210,500 53.5% Investment Assets Fidelity mutual funds 4,500 1.1% Scudder mutual fund 5,000 1.3% Ford Motor Company stock 2,800 0.7% New York 2038 bonds 4,000 1.0% Life insurance cash value 5,400 1.4% IRA accounts 34,300 8.7% Real estate investment 114,000 29.0% Total Investment Assets $170,000 43.2% Total Assets $393,250 100.0% LIABILITIES Short-Term Liabilities Dentist bill due 220 0.1% Credit card debt 1,600 0.4% Total Short-Term Liabilities $ 1,820 0.5% Long-Term Liabilities Vehicle loan 7,700 2.0% Home mortgage loan 92,000 23.4% Total Long-Term Liabilities $ 99,700 25.4% Total Liabilities $101,520 25.8% Net Worth $291,730 74.2% Total Liabilities and Net Worth $393,250 100.0%
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