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Applied Math 40S Slides May 7, 2007
 

Applied Math 40S Slides May 7, 2007

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Net Worth statements and how to find the largest mortgage a buyer can afford.

Net Worth statements and how to find the largest mortgage a buyer can afford.

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    Applied Math 40S Slides May 7, 2007 Applied Math 40S Slides May 7, 2007 Presentation Transcript

    • Net Worth Terminology Assets: the value of everything you own, including any cash or bank deposits, material goods, and investments. Categories of Assets (1) Liquid Assets: These include cash accounts (i.e., your chequing and savings accounts), T-bills, money market funds -- any money you can get at quickly and without penalty. This is money available in case of emergency, and also in case of investment opportunities. (2) Semi-Liquid Assets: These include longer-term investments such as stocks, bonds, mutual funds, RRSPs, or real estate. These investments are intended to provide for major future needs such as purchasing a house or retirement. (3) Non-Liquid Assets: These include material goods such as your house, car, computer, and other personal property. These items are intended for your long-term personal use, and are not easily converted to cash.
    • Liabilitites: any debt you need to pay. Types of Liabilities (1) Short-Term Debts: These are debts that must be paid within the next 12 months. These include credit card debts, consumer loans, and smaller personal debts. (2) Long-Term Debts: These are used for two purposes: • to pay for investments such as real estate, including your home • to pay for major purchases such as a summer cottage, motor home, or car
    • Net Worth: the difference between your assets and your liabilities. Net Worth = Assets - Liabilities Equity is the same as net worth. Note that equity and 'total assets' are not the same.
    • The Debt/Equity Ratio Shows how your debts compare with your net worth. A debt/equity ratio of 0.40 would indicate that the value of all the debts is 40% of one's net worth. A person's or family's debt/equity ratio should not exceed 50%. The debt mentioned above includes all short-term and long-term debts except the mortgage on your home. Therefore, the formula for the debt/ equity ratio is:
    • How to Increase Net Worth The following three strategies to raise one's net worth are often recommended by financial planners. (1) Save more on a regular basis. (2) Reduce your debt. (3) Get a higher rate of return on your investments.
    • Net Worth Problem Mona would like to do some extensive house renovations, but she decided to calculate her net worth and debt/equity ratio before applying for a loan. The following information was used in her calculations. • Her house is valued at $93,000, and she still has a $62,000 mortgage against the house. • She has $4600 in a bank savings account, and she has invested $21 500 in mutual funds. • Her car is valued at $16,000, and she still has a two-year loan for $9600 against it. • She has a life insurance policy with a cash surrender value (near cash) of $5300. • She has RRSPs worth $9450, and owns Canada Savings Bonds valued at $1800. • Her credit card debt is $2554, and she has a $3015 consumer loan (for furniture) payable in the next six months.
    • • Her house is valued at $93,000, and she still has a $62,000 mortgage against the house. • She has $4600 in a bank savings account, and she has invested $21 500 in mutual funds. • Her car is valued at $16,000, and she still has a two-year loan for $9600 against it. • She has a life insurance policy with a cash surrender value (near cash) of $5300. • She has RRSPs worth $9450, and owns Canada Savings Bonds valued at $1800. • Her credit card debt is $2554, and she has a $3015 consumer loan (for furniture) payable in the next six months. (a) Create a Net Worth Statement for Mona. (b) What is Mona’s net Worth? (c) What is Mona’s Debt/Equity Ratio? (d) How would these change if Mona made a bank loan for the renovations of $15,000? (e) Should Mona apply for the loan? If not, can you suggest another way she can finance her planned home renovations?
    • "How Much Can I Afford to Pay for a Home?"
    • Calculating the maximum mortgage you can afford ...