Question

Karen Price has determined that her net worth is $56,000, excluding her home. She owes $80,000 on her mortgage and $13,000 on a car loan. What is Karen's debt-to-equity ratio?

Answer 1

Answer:

Explanation:

Net worth is the difference between a person's (assets - liabilities)

Based on the balance sheet equation; Assets = Liabilities + Equity , meaning that Assets - Liabilities = Equity .

With the above two equations, Net worth = Equity = $56,000

Debt-to- Equity ratio = Debt/ Equity

Note: $80,000 mortgage will not be included as debt to avoid double counting error since it is is a  pay towards a home(asset) already incorporated in the $56,000 net worth.

So, D/E = 13,000 / 56,000

D/E = 0.2321