# Question: 1 Kevin Jones is single and recently graduated from law

1. Kevin Jones is single and recently graduated from law school. He earns \$9000 per month, an awesome salary for someone only 26 years old. He also has \$1400 withheld for federal income tax, \$540 for state income taxes, \$688 for Medicare and Social Security taxes, and \$230 for health insurance every month. Kevin has outstanding student loans of almost \$80,000 on which he pays about \$900 per month and a 0% auto loan payment of \$300 on a Ford Fusion Hybrid he purchased new during law school. He is considering taking out a loan to buy a Kawasaki motorcycle.
(a) What is Kevin’s debt payments-to-disposable income ratio?
2. Carmen and Juan Montoya have just finished putting their three daughters through college. As empty-nesters, they are considering purchasing a vacation home on a nearby lake because prices have dropped in recent years. The house might also serve as a retirement home once they retire in 12 years. The Montoyas’ net worth is \$283,000 including their home worth about \$265,000 on which they currently owe \$143,000 for their first mortgage. Their outstanding debts in addition to their mortgage include \$12,500 on one car loan, \$13,700 on a second car loan, and a \$25,500 second mortgage on their home taken out to help pay for college expenses.
(a) Calculate the Montoyas’ debt-to-equity ratio.
(b) Advise them as to the wisdom of borrowing for a vacation home at this time.
3. Chelsea Menken recently graduated with a degree in food science and now works for a major consumer foods company earning \$20K per year with about \$36,000 in take-home pay. She rents an apartment for \$1040 per month. While in school, she accumulated about \$38,000 in student loan debt on which she pays \$385 per month. During her last fall semester in school, she had an internship in a city about 100 miles from her campus. She used her credit card for her extra expenses and has a current debt on the account of \$8000. She has been making the minimum payment on the account of about \$320. She has assets of \$14,000.
(a) Calculate Chelsea’s debt payment-to-disposable income and debt-service-to-income ratios.
(b) Calculate Chelsea’s debt-to-equity ratio.
(c) Comment on Chelsea’s debt situation and her use of student loans and credit cards while in college.

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