ASSIGNMENT 2.

1. Review the financial statements of Victor and Maria Hernandez (Table 3.3 and Table
3.5) 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?

total investment assets

Total investment assets-to-net worth ratio=
net worth
$ 109,000
=
$ 208,555
=0.5226
=52.26%

To calculate an investment assets-to-net-worth ratio for Victor and Maria, divide the
value of their investment assets ($109,000) by their net worth ($208,555). The resulting
ratio (0.5226) suggests that 52.26 percent of the Hernandezes net worth is attributable
to their investment assets. This is an acceptable ratio for a couple with children.

The Hernandezes do seem to have too few monetary assets, which should be readily
available for meeting daily expenses as well as emergency expenses. Additional
emergency funds would be recommended. Victor and Maria could use the net gain from
their cash-flow statement to increase the amount in savings. A solution for this is to
decrease or move the annual contribution to their investment and tangible assets to
monetary assets, but looking at their annual discretionary income, it appears there won't
be any space for this, as just a limited quantity is left for them every year. Another
remedy is to decrease expenses, but looking at their list of expenses in Table 3.5, there
seems to be no excessive and unnecessary expense that needs changing, so it
probably won't be a significant one, despite the fact that it will help. Since they are
presumably still on the accumulating stage as they are still paying for their home loan
which takes out a tremendous part of their pay and accumulating fund accounts on their
retirement, and so forth. In the event that this is important for their monetary plan then
they should keep doing as such.

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

The diversification of the couple's investment assets is excellent. It is spread over

several types of investments from stock and bonds life insurance, retirement funds to
real property investments.

(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?

total assets
Asset-to-debt ratio=
total liabilities
$ 309,920
=
$ 101,365
= 3.0574

This ratio measures the capacity to pay out debts using assets. This is a measure of
solvency. A ratio of 1 means that your assets is just enough to pay your debts for
example assets = debts, a ratio of less than 1 means that assets is not sufficient to pay
debts like insolvent a ratio of greater than 1 means that assets are more than enough to
pay liabilities. The total asset of Hernandez family is at least 3 times more than 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?
Victor and Maria should make investments that pay higher dividends and interest. They
currently have a large amount of labor income, but investment income could be
increased once their investments are more diversified. The question is contradicting,
since it is just normal that income from labor is higher than income from investments.
There is no imbalance.

(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?

The Hernandezes have no net surplus each month. So they need to cut expenses about
$300 more per month. They could save the money for their vacation by cutting their
clothing spending $70 per month, their food spending by $70 per month, utilities by $20
per month by being more careful with heating and cooling, both Victor’s and Maria’s
personal allowances by $25 a month each and each child’s personal allowance $10 per
month, by reducing their emergency savings into the credit union by $50 per month and
by reducing their miscellaneous expenses by $20 per month.. Those cuts totaled up to
$300 per month ($70 + $70 + $20 + $25 + $25 + $10 + $10 + $50 + $20) for the
vacation.