Financial planning case 3-2 Victor and Maria Hernandez

Victor and Maria, both in their late 30s, have two children: John, age 13 and Joseph, age 15. Victor has had a long sales career with a retail appliance store. Maria works part-time as a medical records assistant. The Hernandezs own two vehicles and their home, on which they have a mortgage. They will face many financial challenges over the next 20 years, as their children drive, go to college, and leave home and go out in the world on their own. Victor and Maria also recognize the need to further prepare for their retirement and the challenges of aging.

Victor and Maria spent some time making up their first balance sheet, which is shown in the table.

Balance Sheet for a Couple with Two Children-Victor and Maria Hernandez, January 1, 2018
		Dollars		Percent
ASSETS
Monetary Assets
Cash on hand		1,200		0.3%
Savings account		4,200		1.1%
Victor's checking account		2,700		0.7%
Maria's checking account		3,300		0.8%
Tax refund due		700		0.2%
Rent receivable		650		0.2%
Total Monetary Assets		$ 12,750		3.3%
Tangible Assets
Home		192,000		49.0%
Personal property		9,000		2.3%
Automobiles		9,500		2.4%
Total Tangible Assets		$210,500		53.7%
Investment Assets
Fidelity mutual funds		4,500		1.1%
Scudder mutual fund		5,500		1.4%
Ford Motor Company stock		2,900		0.7%
New York 2038 bonds		4,000		1.0%
Life insurance cash value		5,400		1.4%
IRA accounts		34,400		8.8%
Real estate investment		112,000		28.6%
Total Investment Assets		$168,700		43.0%
Total Assets		$391,950		100.0%
LIABILITIES
Short-Term liabilities
Dentist bill		220		0.1%
Credit card debt		1,500		0.4%
Total Short-term Liabilities		$ 1,720		0.4%
Long-Term liabilities
Vehicle loan		8,300		2.1%
Home mortgage loan		92,100		23.5%
Total long-term liabilities		$100,400		25.6%
Total Liabilities		$102,120		26.1%
Net Worth		$289,830		73.9%
Total Liabilities and Net Worth		$391,950		100.0%

Victor and Maria are a bit confused about how various financial activities can affect their net worth.

1. Assume that their home is now appraised at $200,000 and the value of their automobile has dropped to $8,000. Calculate and characterize the effects of these changes on their net worth. Round your answer to the nearest dollar. Net worth would (decrease, increase, not affect) by $____ because the value of the real estate rose (less than, more than, the same amount as) the value of the car declined. Calculate the effects of these changes on their asset-to-debt ratio. Round your answers to three decimal places. Old asset-to-debt ratio: ____ New asset-to-debt ratio: _____
2. If Victor and Maria take out a bank loan for $1,500 and pay off their credit card debts totaling $1,500, what effects would these changes have on their net worth? Taking out a bank loan to pay off the credit card liability would the (decrease, increase, not affect) Hernandezs' net worth.
4. If Victor and Maria sell their New York 2038 bond and put the cash into the savings account, what effects would this have on their net worth and liquidity ratio? Assume their annual expenses are $86,670. Round your answers to three decimal places. Selling the New York bond would (decrease, increase, not affect) the Hernandezs' net worth. The liquidity ratio would (decrease, increase, not affect) from ___ to ___ .