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Presentation on Net Worth and Ratio Analysis

1. Prepare Net Worth statement for the Days


Net worth statement gives the difference of the Net assets of the family and the net
liabilities. This net worth gives the net economic position of the family (Lusardi &
Mitchelli, 2007). The Net worth format will be divided into two sides, the assets and
liabilities, to get the overall total of the net worth in the mannerNet Worth = Net Assets Net Liabilities
PERSONAL NET WORTH STATEMENT
ASSETS
Cash on hand 0

LIABILITIES
Notes Payable to Credit Card $ 8000

Savings Accounts $ 10,000

Installment Account (Auto) $ 20,000

Retirement Funds $ 260,000

Installment Account (Other) $

Life insurance - $ 0

Mortgages on Real Estate $240,000

Stocks and Bonds $ 0

Unpaid Taxes $

Real Estate $ 0

Other Liabilities $2,000

Automobiles (2) Present Value $ 30,000

Total Liabilities $270,000

Personal Property $ 550,000


Other Assets 25,000
(Investment fund)
Total Assets $ 875,000

The net worth of Day family is = 875,000-270,000 = $605,000


2. Undertake ratio analysis for the Days current situation.
In this question, we shall analyse the Net worth Ratio, Liquidity Ratio, Savings Ratio,
and Debt Service Ratio.
Net worth Ratio
The Net worth ratio gives the percentage of the net worth of the couple on their total
assets. This indicates how stable the family is, a lower net worth means, that the family
has more liabilities, and hence poorer stability. Conversely, a better net worth means a
higher solvency, and better stability. The ideal net worth according to researchers is the in

between 50 to 100 per cent, 100 per cent being the ideal case (Weisbrod & Hansen,
1968).
Net worth ratio = Net worth X 100 = 605,000/875,000* 100 = 69.14
Total Assets
As the Days net worth is 69.14 per cent, they are better off and more stable.
Liquidity Ratio
The liquidity ratio gives the ratio of the liquid assets (cash, saving account, etc) to the
immediate debt. This indicates the familys ability to pay its short term obligations; a
higher ratio means that there is a better safety margin (Altman, 1968).
Liquidity ratio = Liquid assets X 100 = 10,000/30,000*100 = 33.33
Current debt
Ideally the liquid ratio should be 50 per cent of the total debt, but in the case of the Days
it is at 33.33 per cent.
Multiplying the liquidity ratio by 12 for expressing in months, 3.99 (approx 4 months).
There is 4 months of liquid assets are there to meet the current liabilities.
It is assumed that auto installment and other liabilities are to be paid within the next 12
months besides the credit card payment. The retirement funds and investment funds are
invested for long term i.e. maturing after 12 months.
Savings Ratio
The savings ratio gives the percentage value of the savings that are done by the family on
the overall income. As the overall income is $102,000, the family saves, about 10 per
cent of their income, which is above average by many standards (Arrow & Kurz, 1969).
Savings ratio = Savings
X 100 = 10,000/102,000 * 100 = 9.8 per cent
Net income
Savings include, net income of $5,000 plus the personnel contribution to superannuation
$5,000.
Debt Service Ratio
The debt service ratio is used as a heuristic, that is used to analyse whether the family is
in too much of debt, generally a percent value of less than 40 per cent is considered to be
acceptable in the United States, The Days with roughly half of that value are certainly
eligible for more loans in the future (Maki, 2002).
Debt service ratio = Annual debt commitments/12 months X 100
Annual net income/12 months
= 20,000/12 X 100 = 1666.67/8500 * 100 = 19.6 per cent
102,000/12
The repayment commitment annually has been taken at $20,000 as per net worth
statement and the annual net income is taken as $5,000 after tax payment

3. If the Days were given $50,000 from an inheritance, suggest three options (with reasons)
that they may consider for the funds and prepare a new net worth statement and ratio
analysis for their changed situation.
1st option: the entire $50.000 may be used to repay the mortgage on real estate as a result
of this the revised net worth will be
Net worth = 875,000 - 220,000=655,000
The result of this would be that there will be change only in the net worth ratio
The new net worth ratio = 655,000/875,000*100=74.86
There is an increase of 5.72% in the net worth of the family which will give the family a
better financial stability in the future, and help them be more immune to uncertainties in
their income, which can be brought about due to job layoffs due to a very uncertain
economic climate.
Another aspect that the Days can think of is to increase their super annuity funds, as they
are fast approaching the middle age, this can come with additional responsibilities like
sending to the kids to a good college for higher education, or saving for the exigencies
that may be brought on due to increasing costs of health care, as the husband and wife get
older (Lusardi & Mitchell, 2011).

References
Lusardi, A., & Mitchelli, O. (2007). Financial literacy and retirement preparedness:
Evidence and implications for financial education. Business Economics, 42(1), 35-44.
Weisbrod, B. A., & Hansen, W. L. (1968). An income-net worth approach to measuring
economic welfare. The American Economic Review, 58(5), 1315-1329.
Arrow, K. J., & Kurz, M. (1969). Optimal public investment policy and controllability
with fixed private savings ratio. Journal of Economic Theory, 1(2), 141-177.
Maki, D. M. (2002). The growth of consumer credit and the household debt service
burden (pp. 43-68). Springer US.
Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of
corporate bankruptcy. The journal of finance, 23(4), 589-609.

Lusardi, A., & Mitchell, O. S. (2011). Financial literacy and planning: Implications for
retirement wellbeing (No. w17078). National Bureau of Economic Research.