1. Using the data given in this case and elsewhere in this chapter, calculate what the Steeles’ contribution to savings would have been in 2008 if they bought the condo on January 1, 2008. (Assume mortgage interest payments would have been $5,736 for the year and that they benefit from the mortgage interest deduction. Also assume that the marginal tax rate is 28 percent and that all other expenses and taxes not related to the purchase remain the same.)
2. Prepare a new balance sheet at December 31, 2009 for the Steeles, again assuming that they made the purchase on January 1, 2008, and that payments of principal on the mortgage were $3,108 for the year. Assume that any reduction in savings was funded with current assets.
3. Using the four ratios given in this chapter to evaluate liquidity and total debt, make new calculations for the Steeles, assuming the condo purchase, and compare them with those calculated in the chapter. Assume that any reduction in savings was funded with current assets. Discuss the comparisons.
4. Do you agree with the Steeles that the purchase would have been a financial strain? Explain your answer.
At the end of 2008 Arnold and Sharon Steele were considering buying a condominium in Gatlinburg, Tennessee. Gatlinburg is a resort town next to the Great Smoky Mountain National Park area, where the Steeles have often camped. The condo they particularly liked was priced at $97,000, and the seller offered to finance 90 percent of the purchase price with a 15-year mortgage loan requiring monthly payments of $737 during the first year. To make the $9,700 down payment and $2,200 of closing costs, the Steeles planned to sell their Coleman camper (which was worth $4,100 at that time) and their U.S. Series EE bonds (then worth $6,000). The balance of $1,800 would be borrowed from Sharon’s parents, who would not expect regular repayments of the loan but would charge interest of $100 each year. Arnold and Sharon decided against the purchase for a number of reasons, one of which involved finances. They felt that the condo would have placed an excessive strain on their budget, given their alternative goal of adding to their investments and liquid assets.