1. Review the financial statements of Victor and Maria Hernandez (Table) and respond to the following questions:

(a) Using the data in the Hernandezes’ balance sheet, calculate an investment assets-to-net worth ratio. How would you interpret the ratio? The Hernandez family appears to have too few monetary assets compared with tangible and investment assets. How would you suggest that they remedy that situation over the next few years?

(b) Comment on the couple’s diversification of their investment assets.

(c) Calculate the asset-to-debt ratio for Victor and Maria. How does this information help you understand their financial situation? How do their total assets compare with their total liabilities?

(d) The Hernandezes seem to receive most of their income from employment rather than investments. What actions would you recommend for them to remedy that imbalance over the next few years?

(e) The Hernandezes want to take a two-week vacation next summer, and they have only eight months to save the necessary $2400. What reasonable changes in expenses might they consider to increase net surplus and make the needed $300 per month?

2. Jennifer Pontesso wants to better understand her financial situation. Use the following balance sheet and cash-flow statement information to determine her net worth and her net surplus for a recent month. Liquid assets: $10,000; home value: $210,000; monthly mortgage payment: $1300 on $170,000 mortgage; investment assets: $90,000; personal property: $20,000; total assets: $330,000; short-term debt: $5500 ($250 a month); total debt: $175,500; monthly gross income: $9000; monthly disposable income: $6800; monthly expenses: $6000.   

3. Now that Jennifer better understands her situation she wants to do some analysis of what she has found. Given her balance sheet and cash-flow statements calculate the following ratios:

(a) Liquidity ratio

(b) Asset-to-debt ratio

(c) Debt-to-income ratio

(d) Debt payments-to-disposable income ratio

(e) Investment assets-to-total assets ratio

4. Cash Flow Surplus/Deficit. Cody Sebastion earns $40,000 a year. He pays 30 percent of his gross income in federal, state, and local taxes. He has fixed expenses in addition to taxes of $1200 per month and variable expenses that average $900 per month. What is his net cash flow (surplus or deficit) for the year?

5. Thomas Green has been a retail salesclerk for six years. At age 35, he is divorced with one child, Amanda, age 7. Thomas’s salary is $36,000 per year. He regularly receives $400 per month for child support from Amanda’s mother. Thomas invests $100 each month ($50 in his mutual fund and $50 in U.S. savings bonds). Using the following information, construct a balance sheet and a cash-flow statement for Thomas.

ASSETS                                                                                             Amount

Vested retirement benefits (no employee contribution) ……… $3,000

Money market account (includes $150 of

interest earned last year) …………………………………………              5,000

Mutual fund (includes $200 of reinvested dividend

income from last year) …………………………………………                  4,000

Checking account ………………………………………………                    1,000

Personal property ………………………………………………                   5,000

Automobile …………………………………………………….                       3,000

U.S. savings bonds …………………………………………….                   3,000

LIABILITIES                                                           Outstanding Balance

Dental bill (pays 425 per month and is included in

uninsured medical/dental) ……………………………………               $ 450

Visa (pays $100 per month) …………………………………                 1,500

Student loan (pays $100 per month) ………………………..           7,500

ANNUAL EXPENSES                                                                    Amount

Auto insurance ……………………………………………...                        $ 780

Rent …………………………………………………………                               9,100

Utilities ……………………………………………………...                            1,200

Phone ………………………………………………………..                               680

Cable ………………………………………………………..                                360

Food ………………………………………………………..                              3,000

Uninsured medical/dental …………………………………..                1,000

ANNUAL EXPENSES                                                                    Amount

Dry cleaning ………………………………………………..                            480

Personal care ………………………………………………..                          420

Gas, maintenance, license …………………………………..                2,120

Clothes ……………………………………………………..                               500

Entertainment ………………………………………………                       1,700

Vacations/visitation travel ………………………………….                 1,300

Child care …………………………………………………..                          3,820

Gifts ………………………………………………………..                                400

Miscellaneous ………………………………………………                          300

Taxes ……………………………………………………….                            4,600

Health insurance ……………………………………………                     2,440

6. Leyia and Aldolfo DeVaney of Monument, Colorado, have decided to start a family next year, so they are looking over their budget (illustrated in Table 3-5 as the “young married couple”). Leyia thinks that she can go on half-salary ($1050 instead of $2100 per month) in her job as a graduate assistant for about 18 months after the baby’s birth; she will then return to full-time work.

(a) Looking at the DeVaneys’ current monthly budget, identify categories and amounts in their $4315 budget where they realistically might cut back $1050. (Federal and state taxes should drop about $290 as their income drops.)

(b) Assume that Leyia and Aldolfo could be persuaded not to begin a family for another two to three years until Leyia finishes graduate school. What specific budgeting recommendations would you give them for handling (i) their fixed expenses and (ii) their variable expenses to prepare financially for an anticipated $1050 loss of income for 18 months as well as the expenses for the new baby?

(c) If the DeVaneys’ gross income of $4315 rises 3 percent per year in the future, what will their income be after five years?