Question 3 (10 marks) (a) Robert owns a $1,750,000 flat. As at 31 October, 2017,

Question

Question 3 (10 marks) (a) Robert owns a $1,750,000 flat. As at 31 October, 2017, he has the following liabilities: Unpaid mortgage $1,400,000 Credit card balance $2,800 Education loan $20,000 Auto loar $150,000 Robert's net worth (including his flat and unpaid mortgage) is $700,000. His monthly bring-home salary is S30,000 and his monthly spending is $8,000. What is Robert's debt-to-equity ratio? Has he reached the upper limit of debt obligations? Explain. (6 marks) (b) In one evening, Lulu went to the ATM and intended to withdraw money with her debit card. Since the light is quite dim, she inadvertently pulled out her credit card and used it to withdraw S3,000 cash. Later, she realized the mistake and paid back the cash advance amount in one month. If her credit card company charges a cash advance fee of 8% and interest at 36% APR. what are the total finance charge she needs to pay for this careless mistake? Show all workings. 4 marks)

Explanation / Answer

Assets Liabilities Liabilities Ownership of flat $1,750,000 Unpaid mortgage $1,400,000 Other assets $552,800 Credit card balance $2,800 Education loan $20,000 Personal loan $30,000 Auto loan $150,000 Total liabilities $1,602,800 Net worth $700,000 TOTAL assets $2,302,800 TOTAL Liabilities & Net Worth $2,302,800 Debt to equity ratio= 2.28971429 (Total liabilities)/(Net worth) The accptable Debt to equity ratio is around 2.5 He has nearly reached the upper limit of debt obligation Annual income $360,000 (30000*12) Annual debt service expenses $264,000 (30000-8000)*12(Assuming all savings from take home income is spent on debt servicing) Debt service to Income 0.73333333 Debt service to income ratio is high b) Cash Advance fees charged $      240.00 (3000*0.08) Interest for one month $        90.00 (3000*(0.36/12)) Total charges $      330.00 Total finance charges for one month $330 11.00% (330/3000)*100% Annualized charges 132%

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