Dividend Policy and Dividend Decision Theories.pptx
Applied Math 40S May 16, 2008
1. How much are
you worth?
(Net Worth)
this time for real
Money Suit by flickr user zoomar
2. T. Bekka needs a $105 000 mortgage which he will repay with monthly
payments in 25 years. The first bank he visits offers a mortgage at 8.5%,
and the second bank at 7.9%. HOMEWORK
1. How much does he save each month if he takes the second
offer?
2. How much does he save over the life of the mortgage if he
takes the second offer?
3. The Meaning of Net Worth
Net Worth is the difference between your assets and your
liabilities. The term assets refers to the value of everything you
own, including any cash or bank deposits, material goods, and
investments. A liability is any debt you need to pay.
Net worth = Assets - Liabilities
Equity is the same as net worth. Note that
equity and 'total assets' are not the same.
4. Assets
When completing a Net Worth Statement (which will be shown
later), it is useful to subdivide the assets into three categories:
5. Assets
When completing a Net Worth Statement (which will be shown
later), it is useful to subdivide the assets into three categories:
1. Liquid Assets: These include cash accounts (i.e., your
chequing and savings accounts), T-bills, money market funds --
any money you can get at quickly and without penalty. This is
money available in case of emergency, and also in case of
investment opportunities.
6. http://youtube.com/watch?v=MJJN9qwhkkE
Assets
When completing a Net Worth Statement (which will be shown
later), it is useful to subdivide the assets into three categories:
1. Liquid Assets: These include cash accounts (i.e., your
chequing and savings accounts), T-bills, money market funds --
any money you can get at quickly and without penalty. This is
money available in case of emergency, and also in case of
investment opportunities.
2. Semi-Liquid Assets: These include longer-term investments
such as stocks, bonds, mutual funds, RRSPs, or real estate.
These investments are intended to provide for major future
needs such as purchasing a house or retirement.
7. Assets
When completing a Net Worth Statement (which will be shown
later), it is useful to subdivide the assets into three categories:
1. Liquid Assets: These include cash accounts (i.e., your
chequing and savings accounts), T-bills, money market funds --
any money you can get at quickly and without penalty. This is
money available in case of emergency, and also in case of
investment opportunities.
2. Semi-Liquid Assets: These include longer-term investments
such as stocks, bonds, mutual funds, RRSPs, or real estate.
These investments are intended to provide for major future
needs such as purchasing a house or retirement.
3. Non-Liquid Assets: These include material goods such as
your house, car, computer, and other personal property. These
items are intended for your long-term personal use, and are not
easily converted to cash.
9. Liabilities
Liabilities are divided into two types:
1. Short-Term Debts: These are debts that must be paid within
the next 12 months. These include credit card debts, consumer
loans, and smaller personal debts.
10. Liabilities
Liabilities are divided into two types:
1. Short-Term Debts: These are debts that must be paid within
the next 12 months. These include credit card debts, consumer
loans, and smaller personal debts.
2. Long-Term Debts: These are used for two purposes:
• to pay for investments such as real estate, including your home
• to pay for major purchases such as a summer cottage, motor home,
or car
11. The Meaning of Net Worth
Net Worth is the difference between your assets and your
liabilities. The term assets refers to the value of everything you
own, including any cash or bank deposits, material goods, and
investments. A liability is any debt you need to pay.
Net worth = Assets - Liabilities
Equity is the same as net worth. Note that
equity and 'total assets' are not the same.
12. The Debt/Equity Ratio
The debt/equity ratio shows how your debts compare with your
net worth. A debt/equity ratio of 0.40 would indicate that the
value of all the debts is 40% of one's net worth. A person's or
family's debt/equity ratio should not exceed 50%.
The debt mentioned above includes all short-term and long-term
debts except the mortgage on your home. Therefore, the formula
for the debt/equity ratio is:
Total Liabilities - Mortgage
Debt/Equity Ratio =
Net Worth
13. http://tinyurl.com/4x8exe
Includes
Mortgage
Does Not Include
Mortgage
Total Liabilities - Mortgage
Debt/Equity Ratio =
Net Worth
14.
15. Net Worth Problem
Mona would like to do some extensive house renovations, but
she decided to calculate her net worth and debt/equity ratio
before applying for a loan. The following information was used in
her calculations.
• Her house is valued at $93,000, and she still has a $62,000
mortgage against the house.
• She has $4600 in a bank savings account, and she has invested
$21 500 in mutual funds.
• Her car is valued at $16,000, and she still has a two-year loan for
$9600 against it.
• She has a life insurance policy with a cash surrender value (near
cash) of $5300.
• She has RRSPs worth $9450, and owns Canada Savings Bonds
valued at $1800.
• Her credit card debt is $2554, and she has a $3015 consumer
loan (for furniture) payable in the next six months.
16. Mona's financial situation looks good, because her debt/equity
ratio is 0.20, or 20%. How would this change if she made a bank
loan for $15,000? Should she apply for the loan?
17. Note that the loan would raise Mona's debt/equity ratio to 0.51, or
51%. Maybe she should postpone the renovations and save
some money first, or reduce the cost of the renovations.
It is also interesting to
note that if Mona were
to take the money
from her mutual funds
instead of making a
loan, her debt/equity
ratio would rise to
about 0.26, or 26%.
(This calculation has
not been shown.)
18. How to Increase Net Worth
The following three strategies to raise one's net worth are often
recommended by financial planners.
19. How to Increase Net Worth
The following three strategies to raise one's net worth are often
recommended by financial planners.
1. Get a higher rate of return on your investments. You need to
exercise caution here, because investments with higher rates of
return are often more risky, and there may be a greater chance of
losing money.
20. How to Increase Net Worth
The following three strategies to raise one's net worth are often
recommended by financial planners.
1. Get a higher rate of return on your investments. You need to
exercise caution here, because investments with higher rates of
return are often more risky, and there may be a greater chance of
losing money.
2. Reduce your debt. Most consumers can reduce their debts --
especially consumer debts -- by planning and following a budget.
21. How to Increase Net Worth
The following three strategies to raise one's net worth are often
recommended by financial planners.
1. Get a higher rate of return on your investments. You need to
exercise caution here, because investments with higher rates of
return are often more risky, and there may be a greater chance of
losing money.
2. Reduce your debt. Most consumers can reduce their debts --
especially consumer debts -- by planning and following a budget.
3. Save more on a regular basis. Most financial advisors believe
that this is the primary key to building wealth. The advice in
Senior 3 Applied Mathematics was to save 10% of your income to
'pay yourself first.' This means save before you spend, not save if
you have anything left after spending.
22. Dave, age 30 and single, is concerned about his finances. He
visits a financial advisor to help him determine whether his
finances are in good order. The advisor requires the following
information to prepare a Net Worth Statement.
HOMEWORK
He lives in a $100,000.00 home on which there is an outstanding
mortgage of $60,000.00. There is a car loan of $15,000.00 on a
car that is valued at $20,000.00. The loan is for three years. Dave
has $3000.00 in the bank and a $4000.00 cash surrender value
(near cash) on his life insurance policy. He has $10,000.00 in
mutual funds and $3000.00 in Canada Savings Bonds. He also
has RRSPs totaling $15,000.00. At the present time, Dave has a
credit card balance of $4000.00 and a small loan of $2000.00 that
must be paid this year.
Prepare a Net Worth Statement for Dave. What is his debt/equity
ratio?
23. Bill is married and has a young family. He wants to borrow money to
buy a travel trailer. The loan officer at the bank uses the following
information to prepare a net worth statement. HOMEWORK
Bill and his family live in an $80,000.00 home on which there is an
outstanding mortgage of $52,000.00. He owns a car valued at
$20,000.00 and owes $12,000.00 on a loan he took to buy the car. He
has $30 000.00 in an RPP (Registered Pension Plan). He also has
RRSPs valued at $7000.00. Bill owes a credit card company $6000.00,
and he has a personal loan for $2500.00 that must be paid in the next
few months. The family has $1500.00 in a chequing account and
another $3000.00 in a savings account at the local bank. He owns a
boat worth $5000.00.
24. 1. What is the family's present net worth? HOMEWORK
2. What is their debt/equity ratio?
3. The loan required to buy the travel trailer is $25,000.00. Will
the loan increase their debt/equity ratio beyond 0.5?
4. Should Bill buy the travel trailer? Explain.
5. Suggest some ways the family could increase their net worth
and/or decrease their debt/equity ratio.