Given the following information, calculate the debt ratio percentage: Liabilities = $25,000 Liquid assets = $5,000 Monthly credit payments = $800 Monthly savings = $760 Net worth = $75,000 Take-home pay = $2,300 Gross income = $3,500 Monthly expenses = $2,050 = 30.00 percent 3.00 percent 8.20 percent O 3.20 percent 33.33 percent
The Correct Answer and Explanation is :
The debt ratio is a financial metric that measures the proportion of an individual’s or company’s debt relative to their total assets. The debt ratio formula is:
[
\text{Debt Ratio} = \frac{\text{Total Liabilities}}{\text{Total Assets}}
]
In this case, you are given:
- Liabilities = $25,000 (This is the total amount of debt)
- Net Worth = $75,000 (Net worth represents the value of assets minus liabilities)
Step 1: Calculate Total Assets
We can calculate total assets by adding liabilities to net worth. This is because:
[
\text{Net Worth} = \text{Total Assets} – \text{Total Liabilities}
]
Rearranging for Total Assets:
[
\text{Total Assets} = \text{Net Worth} + \text{Total Liabilities}
]
[
\text{Total Assets} = 75,000 + 25,000 = 100,000
]
Step 2: Calculate Debt Ratio
Now that we know the total assets are $100,000, we can calculate the debt ratio:
[
\text{Debt Ratio} = \frac{\text{Total Liabilities}}{\text{Total Assets}} = \frac{25,000}{100,000} = 0.25
]
Convert this to a percentage:
[
\text{Debt Ratio} = 0.25 \times 100 = 25\%
]
So, the correct answer is 25%. However, none of the provided choices matches exactly, which suggests a possible issue with the options.
Explanation of Other Values
The other financial information provided, such as monthly savings, expenses, and income, is useful for understanding the broader financial situation (like cash flow, ability to manage debt, or financial security), but it does not directly affect the calculation of the debt ratio.
The debt ratio reflects the percentage of the individual’s total assets that are financed by liabilities. A lower debt ratio is generally considered safer as it indicates that a smaller proportion of assets are reliant on borrowed funds. In this case, a debt ratio of 25% means that 25% of the individual’s assets are funded by debt, which is relatively low and indicates good financial stability.