Problem 6-3 Calculating the Debt-to-Equity Ratio [LO6-3]

Robert owns a $168,000 town house and still has an unpaid mortgage of $122,000. In addition to his mortgage, he has the following liabilities:
Liabilities
Visa	$ 616
MasterCard	536
Discover card	492
Education loan	932
Personal bank loan	809
Auto loan	4,560
Total	$ 7,945
Robert’s net worth (not including his home) is about $29,100. This equity is in mutual funds, an automobile, a coin collection, furniture, and other personal property.

What is Robert’s debt-to-equity ratio?
Note: Round your answer to 2 decimal places.

Has he reached the upper limit of debt obligations?

### To calculate Robert's debt-to-equity ratio, follow these steps:

1. **Total Debt (Liabilities)**:
   - Unpaid mortgage: $122,000
   - Visa: $616
   - MasterCard: $536
   - Discover card: $492
   - Education loan: $932
   - Personal bank loan: $809
   - Auto loan: $4,560
   - **Total Debt** = $122,000 (mortgage) + $7,945 (other liabilities) = **$129,945**

2. **Total Equity**:
   - His net worth (not including his home) is given as **$29,100**.

3. **Debt-to-Equity Ratio Formula**:
   The formula is:
   \[
   \text{Debt-to-Equity Ratio} = \frac{\text{Total Debt}}{\text{Total Equity}}
   \]

4. **Substitute the values**:
   \[
   \text{Debt-to-Equity Ratio} = \frac{129,945}{29,100} = 4.466 \approx 4.47
   \]

### Robert's Debt-to-Equity Ratio = **4.47**

### Interpretation:
- A debt-to-equity ratio of **4.47** indicates that Robert has significantly more debt than equity, as he has $4.47 in debt for every dollar of equity.
- Generally, a debt-to-equity ratio above **2.0** is considered high, meaning Robert has likely reached or exceeded the upper limit of debt obligations. It may be advisable for him to focus on reducing his debt.

Would you like further details or explanations?

Here are 5 related questions to expand on this topic:
1. How can Robert reduce his debt-to-equity ratio effectively?
2. What are the long-term risks of having a high debt-to-equity ratio?
3. How does the type of debt (e.g., mortgage vs. credit card debt) affect financial planning?
4. How does Robert's mortgage factor into his overall debt ratio?
5. What are the typical debt-to-equity ratio benchmarks for individuals?

**Tip**: Always monitor your liabilities to ensure your debt-to-equity ratio remains manageable, ideally below 2.0.

Robert owns a $168,000 town house and still has an unpaid mortgage of $122,000. In addition to his mortgage, he has the following liabilities: Visa: $616, MasterCard: $536, Discover card: $492, Education loan: $932, Personal bank loan: $809, Auto loan: $4,560. Total liabilities: $7,945. Robert’s net worth (not including his home) is about $29,100. What is Robert’s debt-to-equity ratio?

Learn how to calculate the debt-to-equity ratio using Robert's financial details, including his unpaid mortgage and other liabilities. This example demonstrates key finance concepts and is suitable for high school students studying ratios and personal finance. The problem involves calculating the ratio using the formula Debt-to-Equity = Total Debt / Total Equity.

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