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CHAPTER 12 credit and debt management.docx

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FIN 502
Steve Joyce

CHAPTER 12 credit and debt managementDEBT CAPACITYDebt capacity the amount of debt that he can reasonably expect to be able to repay under the terms of the loan agreements given his current and expected future financial situationsassets liabilities cash flows income expenditures etc o Looks at what the borrower will have in the future interest and principle paymentLender is interested in both the borrowers shortrun and longrun ability to pay interest and principleLiquidity ability of a family to meet its debt service payments in the short runSolvency the longrun ability of the family to pay its debtsTwo important factors that affect your debt capacity are expected net assets or net worth and expected net cash flow each yearDebt service charge how likely the cash flow is to fail to provide for allMatching principle in finance one should match the expected economic life of an asset to the term of maturity of the financing Two debt service ratios 1 Debt service ratio GDS ratiobenchmark not over 30 GDSannual mortgage paymentsproperty taxesgross family income2 Total debt service ratio TDS ratiobenchmark not over 40 TDSmortgage paymentsproperty taxesother debt paymentsgross family incomeCUSTOMER CREDITCustomer credit when people borrow money to purchase customer goods or services o Borrowing mo
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