Ekta is meeting with the Royal Bank (RBC) to go over her ratios as she has applied for a loan.
Description Fair Market Value
Chequing account $20
Furniture $6,855
Furniture loan (11 months remaining) $6,150
Car $24,700
Car loan (4 years remaining) $20,650
Registered Retirement Savings Plan (RRSP) investments: (Stocks) $950
Tax-Free Savings Account (TFSA) $2,275
Savings Account $30
Investments: Mutual Funds (bonds) $185
Student loan (3 years remaining) $11,200
Credit card balance (she has not paid the amount in full, nor the minimum payment for the last 3 months) $1,600
Cash $75
Rent (monthly) $2,250
Utilities including hydro, internet (monthly) $280
a) Ekta has asked you to calculate her Debt-To-Asset ratio based on the information she provided.
Show calculations: (1 mark)
b) Is it likely or unlikely that Ekta will get a bank loan? Explain your response. (.25 marks)
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a)
Total Assets = Chequing account + Furniture + Car + RRSP investments + TFSA + Savings account + Investments + Cash
Total Assets = $20 + $6,855 + $24,700 + $950 + $2,275 + $30 + $185 + $75
Total Assets = $34,090
Total Debt = Furniture loan + Car loan + Student loan + Credit card balance
Total Debt = $6,150 + $20,650 + $11,200 + $1,600
Total Debt = $39,600
Debt-To-Asset Ratio = Total Debt / Total Assets
Debt-To-Asset Ratio = $39,600 / $34,090
Debt-To-Asset Ratio = 1.16
b) It is unlikely that Ekta will get a bank loan because her Debt-To-Asset ratio is 1.16, indicating that she has more debt than assets. Banks are generally hesitant to approve loans for individuals with a high Debt-To-Asset ratio as it suggests a higher likelihood of defaulting on the loan. Additionally, the fact that she has not paid the minimum amount on her credit card for the last 3 months may also raise red flags for the bank.