Victor and Maria, both in their late 30s, have two children: John, age 13, and J
ID: 2638009 • Letter: V
Question
Victor and Maria, both in their late 30s, have two children:
John, age 13, and Joseph, age 15. Victor has had a long
sales career with a major retail appliance store. Maria works
part-time as a medical records assistant. The Hernandezes
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
$192,000 and the value of their automobile has
dropped to $9500. 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 $1545 and
pay off their credit card debts totaling $1545, what
effects would these changes have on their net worth?
(c) If Victor and Maria sell their New York 2028 bond and put the cash into the savings account, what effects would this have on their net worth and liquidity ratio?
Table 3-2
ASSETS
Monetary assets
cash on hand 260 0.07%
Savings account 1,500 0.40%
Victor
Explanation / Answer
a. This change will increase their assets by $14,000, which will also increase their debt-to-asset ratio from 3.7 to 3.8. This will make them more solvent and better able to pay their debts.
b. This would have no effect on their net worth. Their liabilities would remain the same.
c. This would have no effect on their net worth. Their liabilities would remain the same.
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